The pre-money valuation
assesses the value of a company before the next round of funding is accepted. It sets the expectations of both parties —
investor and entrepreneur — for how much ownership of the company the investor takes for the investment. Is the
investor going to receive 10% or 90% of the company.
For example, a company
with a pre-money value of $50,000 that accepts an investment of $200,000 knows that the investor will expect 80% of the
company. If the pre-money value is $300,000 the investor should expect to get 40% of the company. With a pre-money valuation,
you are prepared for the investor who looks you in the eye and says “I’ll give you $25,000 for 51% of your company”
You are ready to make a counteroffer and negotiate your deal.
Lack of experience and the natural trepidation of entering into a new business experience often drives a wedge
been investors and entrepreneurs, keeping deals from being done. In talking with people from both groups
over the years, I’ve learned that it is an inability to determine that value of the investment kills the deal, sometimes
before negotiations begin.
pre-money valuation provides a value snapshot that the founders can use to raise the first outside money from angel investors
or early-stage investment venture capital companies. Your valuation gives you a thoughtful reality check that considers
both the upside that pushes the value and the risk factors that limit the value. You will receive a value range based on
two standard valuation methods.