Venture Capital Mathematics

Venture Capital Mathematics

When discussing investments and valuations venture capitalists (VCs) usually talk about pre-money valuation, post-money valuation and share price.

A VC investor will usually invest money in a business in return for newly-issued shares. The situation prior to the investment transaction is referred to as “pre-money,” and immediately after the transaction, “post-money.” Pre-money and post-money valuations feature heavily in venture capital ‘speak’.

The value of the whole company before the transaction is called the “pre-money valuation” (and similar to a market capitalization), and equates to the price per share multiplied by the number of shares outstanding before the transaction:

Pre-money Valuation = Share Price x Qty of pre-money shares

The total amount invested will be the share price times the number of shares purchased:

Investment = Share Price x Shares Issued

The shares purchased in a venture capital investment are usually new shares, which will lead to a change in the number of shares outstanding:

Qty post-money shares = Qty pre-money Shares + Qty of shares issued during the investment

The effect of the investment transaction on the value of a company is to increase the amount of cash. As a result, the valuation after the transaction is increased by the amount of cash invested:

Post-money valuation = Pre-money valuation + amount invested

The proportion of the company owned by the new VC investors after the deal will be the number of shares they purchased divided by the total shares outstanding:

Proportion owned = Qty shares issued /Qty post-money shares

Another way of looking at this is:

Proportion owned = investment / post-money valuation = investment / (pre-money valuation + investment)

So when an investor proposes an investment of $5 million at $10 million “pre-money valuation, it means that the investors will own 40% of the company after the transaction:

$5m / ($10m + $5m) = 5/15 = 33%

And if you have 2 million shares outstanding prior to the investment, you can calculate the price per share:

Share price = Pre-money valuation / Pre-money shares = $10m / 2m = $5/ share.

And you can calculate the number of shares issued:

Shares Issued = Investment /Share Price = $5m / $5 = 1m

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