Pre-money and post-money valuation:
In start-ups and growth companies, raising capital (funding rounds) or carrying out capital increases is a common lever for accelerating product, sales and expansion. However, it is also one of the points where most misunderstandings arise, because pre-money and post-money are not just "two numbers": they determine the price per share, the percentage the investor buys, the dilution of existing shareholders and, in practice, the architecture of the capitalisation table (cap table) on which future economic and control rights are distributed.
Moreover, in private markets the price is not "discovered" as it is on the stock exchange; it is negotiated. That is why understanding these metrics (and what is included in them) is key to making the transaction transparent and to avoiding information asymmetries that end up generating friction in the shareholders' agreement or in later rounds.
If you are preparing a capital increase or a funding round, through our fundraising and financing structuring service we help you approach it with the right figures and terms from the outset.
What is the pre-money valuation?
The pre-money valuation is the value of a company before it receives the external investment. In other words, it is the value investors attribute to the company based on its assets, capabilities, track record, team, market and growth potential, but without including the new capital to be contributed in the funding round.
This figure reflects the price investors are willing to pay for the company in its current state, considering all the factors that define its value at that moment. The pre-money valuation is therefore crucial for determining the value of the company before the existing shareholders' stakes are diluted by the new investment. The pre-money valuation is the number that reflects how much the business is worth with its assets, team, technology, traction and potential without adding the capital coming into the round. Determining that figure with judgement is, at heart, an exercise in business valuation, adapted to the particularities of a company in its growth phase.
In practice, the pre-money serves three functions:
- It anchors the price negotiation: if new shares are issued, the unit price is derived from the pre-money divided by the number of shares on which it is being calculated.
- It organises the value narrative: in early stages, where there is no EBITDA or cash flow is negative, the valuation is almost always a combination of milestones (product, market, growth) and reasonable expectations of scalability.
- It defines the "split" prior to the round: it is the starting point for measuring how much founders and existing shareholders are diluted.
An essential nuance: "pre-money" does not always mean the same thing if you do not define the denominator
The typical mistake is not only confusing pre with post, but failing to clarify whether the calculation is made on "issued" share capital or on fully diluted share capital. In a professional analysis, "fully diluted" usually includes (depending on the case):
- Shares outstanding,
- Option pool (reserved for employees) if it already exists or if it is agreed that it will be created,
- Convertible instruments (convertible notes, SAFEs, warrants), if their conversion is economically foreseeable.
This matters because the pre-money valuation may remain the same on paper, but the founders' real percentage changes a great deal if, for example, the investor requires an option pool to be created (or enlarged) "before" its entry.
Methodologies for defending a pre-money in start-ups
- Comparables / multiples: useful when there are references (SaaS by ARR, marketplaces by GMV/revenue, etc.), with high sensitivity to the quality of revenue and retention.
- Venture Capital Method: starts from a reasonable "exit", applies an exit multiple and discounts at a target IRR (higher at seed stage than at growth stage).
- At very early stages, the negotiation usually rests on milestones (team, prototype, initial traction, intellectual property) rather than on a traditional DCF.
These approaches are specific to venture capital; we develop them in our guide on how to value a start-up, and they are best understood on the basis of the traditional business valuation methods such as multiples and discounted cash flow (DCF).
Practical example: the effect of the option pool on the "effective pre-money"
Suppose:
- Agreed pre-money: €8.0M
- Investment: €2.0M
- Option pool required: 10% (to hire talent)
Scenario 1 (pool "after" the investment): the pool dilutes everyone proportionally after the investor's entry.
Scenario 2 (pool "before" the investment, typical in VC): the pool is created within the pre-money, and the dilution falls first on the existing shareholders. Result: the nominal pre-money is the same, but the founders end up with less.
The practical conclusion is simple: when you negotiate the pre-money, also negotiate when and how the option pool is counted and which instruments are included in the "fully diluted" figure. Otherwise, two parties may "agree" on €8M… and not be buying/selling the same percentage.
What is the post-money valuation?
The post-money valuation refers to the total value of the company after receiving the investment. This value includes both the pre-money valuation and the capital newly contributed by the investors in the funding round. In other words, the post-money valuation reflects the value of the company once the new investors' capital has been added, and it is this value that is used to calculate the percentage stake each new shareholder will hold.
The post-money valuation is the value of the company after incorporating the new capital. Its basic formula is:
Post-money = Pre-money + Investment
The post-money is what allows the new investor's percentage to be calculated directly (if there are no further adjustments):
Investor % = Investment / Post-money
Example:
- Pre-money value: €100M
- Investment: €50M
- Post-money value: €150M. Investor's stake: 50/150 = 33.33%
The most common "trap" is to calculate the % on the pre-money: the frequent mistake is to think that the investor holds 50% for contributing 50 on top of 100. That ignores the fact that the new capital increases the total value and, therefore, the correct denominator for the final % is the post-money.
Post-money vs "economic post-money" (when there are convertibles)
In real rounds, final ownership may not be so linear, because the following come into play:
- SAFEs / convertible notes: they convert into equity in the next "priced" round, usually with a discount and/or a valuation cap.
- Option pool: if it is agreed to enlarge it "pre-money", the effective dilution changes.
- Share classes and rights: liquidation preferences, participation, etc. (they do not change the nominal %, but they do change the economic split in an exit).
One particularly useful point for avoiding surprises: with SAFEs, the industry migrated to post-money templates because they make it more transparent how much % is being sold (especially where there are several SAFEs in parallel). Even so, if "too much" capital is raised through SAFEs with low caps, the cumulative dilution may be greater than the founder intuitively expected. How these economic and control rights are distributed is then crystallised in the shareholders' agreement, so it is advisable to align both documents.
The risk of excessively high valuations: down rounds and anti-dilution
An aggressive pre-money valuation may "buy" little capital today, but it also leaves the start-up with an implicit obligation: to grow enough to justify a subsequent round at a higher price. If not, the down round appears, with two typical effects:
- A reputational blow and difficulty in attracting capital,
- Possible activation of anti-dilution clauses (common in preferred shares), which adjust the earlier investor's conversion price.
Conceptually, anti-dilution can be:
- Full ratchet (harsher for founders), or
- Weighted average (more balanced and more common).
There is no need to go into formulas in an introductory article, but the message should be clear: valuation is not just "how much it is worth", but what happens if the market changes.
Conclusion on pre-money and post-money valuation:
Understanding the concept of dilution, and the difference between pre-money and post-money valuation, is crucial not only for calculating shareholdings accurately, but also for correctly managing the dilution of founders and other shareholders in successive funding rounds. A proper understanding of these concepts is essential to avoid common mistakes, facilitate successful negotiations and ensure that all parties involved have realistic expectations about the value and ownership of the company after a first round (or successive rounds) of financing.
The difference between a healthy round and a problematic round usually lies in the "details" that accompany those numbers: fully diluted, option pool, convertibles and protection mechanisms in adverse scenarios.
As practical rules:
- Model the cap table before signing (scenarios with/without pool, with/without convertibles, and with assumptions for future rounds).
- Clarify definitions: what the denominator includes (current shares vs fully diluted) and when the option pool is created.
- Avoid dilution surprises: especially if you use SAFEs/convertible notes in stages.
- Balance ambition and sustainability: a "high" valuation is not always better if it increases the risk of a down round or hardens terms.
In Spain, moreover, Law 28/2022 (the Start-ups Act) has strengthened the use of incentives (especially to attract talent with equity) and has set up a certification framework for accessing benefits, which makes it even more advisable to professionalise the planning of rounds and capital structure.
If you are considering capitalising your company through a round (or successive rounds) or a capital increase, at Maraz Corporate Finance we advise you on financing, model your cap table and value your company so that you negotiate the round with realistic expectations and no dilution surprises.
Javier de Rojas Roca de Togores
Partner - Maraz Corporate Finance
Frequently asked questions about pre-money and post-money
What is the difference between pre-money and post-money valuation?
Pre-money is the value of the company before receiving the investment; post-money is that value plus the capital contributed (Post-money = Pre-money + Investment). The new investor's percentage is always calculated on the post-money, not on the pre-money: that is the most frequent mistake.
If I invest 50 in a company worth 100, do I get 50%?
No. The new capital increases the total value: the post-money is 150 (100 + 50), so the investor obtains 50/150 = 33.33%. Calculating the percentage on the pre-money overstates the stake and is a common source of misunderstanding in negotiations.
What is the option pool and why does it matter when it is created?
It is a reserve of shares to attract and retain talent. It matters a great deal whether it is created "before" or "after" the investment: if it is included within the pre-money (the usual practice in VC), the dilution falls first on the existing shareholders, so the nominal pre-money is the same but the founders end up with less. It is advisable to model the cap table and make it clear in the shareholders' agreement.
How is a start-up that is not yet profitable valued?
With specific methods: comparables based on operating metrics (ARR, GMV), the Venture Capital Method (starting from an exit and discounting at a target IRR) and, at very early stages, milestone-based negotiation. We explain this in detail in how to value a start-up, within the general range of valuation methods.
What is a down round and why should I avoid it?
It is a round at a valuation lower than the previous one. It carries a reputational cost and can trigger anti-dilution clauses held by earlier investors (full ratchet or weighted average), which readjust their conversion price at the founders' expense. That is why an overly aggressive initial valuation is not always better: if it cannot be sustained later, it proves expensive.
