Pre-money valuation is what a company is agreed to be worth before new money goes in. Post-money valuation is what it’s worth straight after, which is the pre-money valuation plus the investment. If a business is valued at £4m and raises £1m, its post-money valuation is £5m and the investor owns 20%.
The arithmetic is simple, and what changes the result is what gets counted inside the pre-money valuation, because an option pool or a SAFE that converts in the round comes out of the founder’s holding, not the new investor’s.
Pre-Money vs Post-Money Valuation Defined
Pre-money valuation. The value of the company before the round, which the founder sets and justifies and the investor negotiates. A priced round is always agreed at a pre-money valuation. How that number is reached is covered in startup valuation.
Post-money valuation. The pre-money valuation plus the money raised in the round. It follows from the other two numbers and isn’t negotiated separately.
Fully diluted shares. Every share in issue plus every share that could be issued: options already granted, the unallocated option pool, and any SAFE, advance subscription agreement or loan note that converts. The price per share is worked out on this number.
Post-money valuation = pre-money valuation + investment
Investor’s share = investment ÷ post-money valuation
Price per share = pre-money valuation ÷ fully diluted shares before the round
The Post-Money Formula and a Worked Example
Say a company has 1,000,000 shares, all held by the founders, and agrees a £1m investment at a pre-money valuation of £4m.
| Step | Calculation | Result |
|---|---|---|
| Pre-money valuation | Agreed | £4,000,000 |
| Investment | Agreed | £1,000,000 |
| Post-money valuation | £4m + £1m | £5,000,000 |
| Price per share | £4m ÷ 1,000,000 shares | £4.00 |
| New shares issued | £1m ÷ £4.00 | 250,000 |
| Shares after the round | 1,000,000 + 250,000 | 1,250,000 |
| Investor’s share | 250,000 ÷ 1,250,000 | 20% |
| Founders’ share | 1,000,000 ÷ 1,250,000 | 80% |
The investor’s 20% is the same answer as £1m ÷ £5m. The share count matters because the investor subscribes for a number of new shares at a price, and the price comes from dividing the pre-money valuation by the shares that exist before the money goes in.
The formula also works backwards. An investor who wants 20% for £1m is offering a post-money valuation of £5m (£1m ÷ 20%), which is a pre-money valuation of £4m.
Where the Option Pool Sits
An option pool is a block of shares set aside for future staff, granted as options so key hires can share in the growth. In the UK, many companies grant them under the Enterprise Management Incentives scheme, which lets a company give an employee options worth up to £250,000 in a 3-year period with tax advantages.
In the US, options are usually granted under a company stock option plan. The scheme and its tax treatment differ from country to country, but the arithmetic of the pool is the same wherever the company is registered.
Investors want a pool in place before they invest, so hiring doesn’t reduce their stake after the round. A term sheet will often ask for “a 10% unallocated option pool on a post-money fully diluted basis, included in the pre-money valuation”. That wording means the pool is created before the round and counted inside the £4m, so the shares for it come only out of the existing shareholders’ holding. This is known as the option pool shuffle.
The table shows the same £1m round at a £4m pre-money valuation with different pool sizes, each created before the money goes in.
| Pool inside the pre-money valuation | Price per share | Founders after the round | Pool | Investor | Value of the founders’ shares at the round price |
|---|---|---|---|---|---|
| None | £4.00 | 80% | 0% | 20% | £4.00m |
| 5% | £3.75 | 75% | 5% | 20% | £3.75m |
| 10% | £3.50 | 70% | 10% | 20% | £3.50m |
| 15% | £3.25 | 65% | 15% | 20% | £3.25m |
The investor ends up with 20% in every row. With a 10% pool, the headline pre-money valuation is still £4m, but the founders’ existing shares are being valued at £3.5m. The difference is the pool, valued at the round price.
A quick way to see the real price is to take the pool out of the headline number:
Effective pre-money valuation = headline pre-money valuation − (pool % × post-money valuation)
£4m − (10% × £5m) = £3.5m
The founder has a few ways to deal with it. The pool can be sized to the people the business plans to hire before its next raise, rather than a round percentage, since unused shares still came out of the founders’ holding. Options already granted can count towards the pool. And the founder can settle the pool and the valuation together, putting a higher pre-money valuation to the investor when a large pool is a condition of the deal.
How SAFEs, ASAs and Notes Affect Post-Money
Some companies raise before they can agree a price. A SAFE (simple agreement for future equity) in the US, an advance subscription agreement (ASA) in the UK, or a convertible loan note lets the money go in now and turn into shares at the next priced round, usually with a valuation cap, a discount on the round price, or both. These rounds are covered in more detail in pre-seed funding.
Y Combinator introduced the post-money SAFE in 2018. Its valuation cap is a post-money valuation that includes all the SAFE money, so the holder’s percentage is easy to calculate: £500,000 on a £5m post-money cap is 10% of the company before the priced round. The original SAFE used a pre-money valuation cap, and each holder’s percentage depended on how much other SAFE money converted alongside it.
When the priced round arrives, a term sheet will often define the pre-money valuation to include the shares those instruments convert into. In the example below, a company with 1,000,000 founder shares has raised £500,000 on a post-money SAFE and then raises £2m in a priced round.
| Before the priced round | Shares | Share |
|---|---|---|
| Founders | 1,000,000 | 90% |
| SAFE holder (£500,000 at a £5m post-money cap) | 111,111 | 10% |
| Total | 1,111,111 | 100% |
| After a £2m round at an £8m pre-money valuation | Shares | Share |
|---|---|---|
| Founders | 1,000,000 | 72% |
| SAFE holder | 111,111 | 8% |
| New investor | 277,778 | 20% |
| Total | 1,388,889 | 100% |
The price per share is £8m ÷ 1,111,111 = £7.20, and the new investor’s £2m buys 277,778 new shares at that price. The founders may have expected to keep 80%, as they would with no SAFE, but they keep 72% because the SAFE converts inside the £8m. Their 1,000,000 shares are worth £7.2m at the round price.
A convertible loan note works the same way, with one addition: unpaid interest usually converts too, so the note turns into more shares than the amount first lent. Several SAFEs, ASAs or notes on different caps and discounts can add up to a bigger share of the company than any one of them suggests, so each one needs to be in the cap table model before the term sheet is agreed.
Quick Calculator Table
Each row uses the formulas above with no option pool or converting instruments.
| Pre-money valuation | Investment | Post-money valuation | Investor’s share | Founders keep |
|---|---|---|---|---|
| £1m | £250,000 | £1.25m | 20.0% | 80.0% |
| £1.5m | £500,000 | £2m | 25.0% | 75.0% |
| £2m | £400,000 | £2.4m | 16.7% | 83.3% |
| £3m | £1m | £4m | 25.0% | 75.0% |
| £5m | £1m | £6m | 16.7% | 83.3% |
| £8m | £2m | £10m | 20.0% | 80.0% |
To include a pool, take the pool percentage off the founders’ figure. To include a SAFE or note, work out its conversion shares first and add them to the share count before the round, as in the example above.
What to Check in the Term Sheet
The pre-money valuation only means something alongside the share count, the pool and the converting instruments behind it, so these are the parts of a term sheet to check against it.
- The share count behind the pre-money valuation. The fully diluted definition says what’s counted: shares in issue, options granted, the pool and converting instruments.
- The option pool. Its size, whether it’s created before or after the money, and whether it matches a hiring plan.
- Every converting instrument. Each SAFE, ASA and note, its cap, its discount, any interest, and whether it converts inside the pre-money valuation.
- The price per share. The pre-money valuation divided by the fully diluted share count, which should match the price in the subscription agreement.
- The cap table after completion. Every holder’s shares and percentage once the round closes. In the UK, the new shares then go on public record, because the company has to file a return of allotment within one month.
Terms such as a liquidation preference change what each shareholder receives on a sale without changing the valuation at all, so two offers at the same pre-money valuation can be worth very different amounts to the founder.
FAQs
What is the difference between pre-money and post-money valuation?
Pre-money valuation is the value of the company before the investment, and post-money valuation is the value straight after it. The difference between them is the amount invested, so a £4m pre-money valuation with £1m invested gives a £5m post-money valuation.
How do you calculate post-money valuation?
Post-money valuation is the pre-money valuation plus the new money raised. It can also be worked out from the investor’s share: divide the investment by the percentage the investor ends up with, so £1m for 20% is a post-money valuation of £5m.
Does the option pool come out of the pre-money valuation?
It does when the term sheet says the pool is included in the pre-money valuation, which is a common investor request. The pool is then created before the round, so it reduces the existing shareholders’ holding and leaves the new investor’s percentage untouched.
How do you work out the price per share in a funding round?
The price per share is the pre-money valuation divided by the fully diluted shares in the company before the round. A £4m pre-money valuation on 1,000,000 shares gives a price of £4.00, and the investor’s money divided by that price gives the number of new shares issued.
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This is general information on how pre-money and post-money valuation work and isn’t investment advice.
