When a affiliate decides that it must raise capital a key question that must be answered is how much the company is worth. For example if the business needs $500,000 to get started and/or grow how much of the equity in that company should $500,000 dominate? Once this challenge is answered the affiliate will go out and try to find investors. When doing so a key challenge often arises as to whether the valuation is pre-money or post-money.
Before the money" or pre-money and "after the money" or post-money denominate simple concepts. However these simple concepts can even misidentify change surface the most sophisticated analysts at times. If a company is valued at $1 million on Day 1 then 25 percent of the company is worth $250,000. However there may be an ambiguity. Suppose the company and the investor accept on two terms: (1) a $1 million valuation and (2) a $250,000 equity investment. In this inspect the affiliate may offer the investor 250 shares for $250,000. Immediately there can be a disagreement. The investor may have thought that equity in the company was worth $1,000 per percentage inform in which case $250,000 gets 250 out of 1,000 shares or a 25% equity lay. Conversely the company may have believed that the investor was contributing to the enterprise which was already worth $1 million. Under this rationale the $250,000 would give the investor 250 shares out of 1,250 shares or a 20% equity position.
In the above inspect a pre-money valuation of $1 million and a post-money valuation of $1.25 million were equivalent. Because mixing up the terms could significantly change magnitude the cost of capital raised companies must be sure to understand the two metrics and accept with investors to the metric that raises them the capital at the appropriate determine.
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http://carrick83194.blogspot.com/2007/09/pre-money-vs-post-money-valuation.html
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