What is the difference between pre-money valuation and post-money valuation? How are they different for startups?
Valuations can already be a confusing and challenging element for startup founders. If you’ve started preparing for a fundraising campaign, you now also have to think about pre-money and post-money valuations.
In general, valuation can be a distraction from focusing on some of the most important parts of building and scaling a business. Yet, valuation can be a powerful tool for growing your company. They can make a big difference to you, your organization, and customers in some unexpected ways.
Here’s what you need to know…
Why Are Valuations So Important For Startup Founders?
In general, the valuation may feel like some form of validation of success to some entrepreneurs. Of course, this in itself, or the money isn’t a top priority for most hyper-successful founders. It may be an indicator you are doing other things well, but it can mean the opposite too.
When you are figuring out what is the difference between pre-money valuation and post-money valuation, keep in mind that valuation can have a variety of impacts. It can act as a theoretical benchmark against competitors. You don’t want to be far behind others in your space. One of the most overlooked is recruiting and hiring. Workers love to work for funded companies with big valuations. It is a badge of honor for them on their resumes. It can also be attractive to educated talent who you may be offering stock options to.
The same can apply to partners and vendors, manufacturers and distribution channels and well as remote service providers.
It’s important to know the difference between pre-money valuation and post-money valuation of your startup too. Note that this can be much different from how your company is valued for an acquisition or an initial public offering.
It’s important because this is what really determines the equity share that your investors will get after they close on your funding. When it comes down to fundraising keep in mind that it is all about storytelling. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
What Is Pre-Money Valuation?
When considering what is the difference between pre-money valuation and post-money valuation, note that pre-money valuation is the value an investor puts on your business prior to it receiving your next round of equity funding.
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