Pre-Money, Post-Money and Dilution
A funding round is priced by two figures. The pre-money valuation is what the company is judged to be worth before new cash arrives. The post-money valuation is that value plus the new investment, so post-money equals pre-money plus the amount raised. The investor’s ownership percentage is simply the cheque divided by the post-money value. As later rounds issue new shares, existing holders suffer dilution, meaning their percentage falls even though the company is worth more. The cap table tracks who owns what after every round.
Try it yourself
A round is priced by two numbers: post-money = pre-money + investment, and the new investor owns investment ÷ post-money. Every existing holder is then diluted by the pre ÷ post ratio. The Shark-Tank lens: an offer of “X dollars for Y%” implies post-money = X ÷ Y% and pre-money = post − X.
Why it matters
The whole maths of a round fits on the back of an envelope, and getting it wrong costs founders real ownership. Picture the company as a pie. Pre-money is the size of the pie before the investor puts money in. The investor’s cash adds a new slice, making the post-money pie bigger, and the investor’s ownership is their slice over the whole new pie. Dilution is what happens next round. The pie grows again for the next investor, so your fixed number of shares becomes a thinner slice of a larger pie. That is fine if the pie is growing faster than your slice is shrinking, which is exactly the trade a founder weighs at every raise.
Formulas
Worked examples
A venture capitalist invests A$2 million at an A$8 million pre-money valuation. Find the post-money valuation and the investor’s ownership.
Post-money is pre-money plus the investment, , so A$10 million. The investor’s ownership is the cheque over post-money, percent. The founders retain the remaining 80 percent, now worth A$8 million inside a A$10 million company.
After that round a founder owns 50 percent. A Series B raises A$5 million at a A$20 million pre-money. What is the founder’s ownership after Series B?
Series B post-money is , so A$25 million, and the pre-over-post ratio is . The founder’s stake falls to $50\% \times 0.8 = 40\%$. The percentage dropped by dilution, yet 40 percent of a A$25 million company (A$10 million) is worth more than 50 percent of the earlier A$10 million company (A$5 million).
Common mistakes
- ✗Pre-money and post-money valuations are the same. They differ by exactly the new investment. Post-money equals pre-money plus the cheque, and the ownership split is always taken against post-money, not pre-money.
- ✗Dilution means founders are losing money. Dilution lowers the ownership percentage, not necessarily the dollar value. If the company’s value grows faster than the stake shrinks, the founder is richer despite owning a smaller slice.
- ✗Raising more money is always better. A bigger raise at the same valuation hands away more ownership and control. Founders weigh the cash needed against the dilution it costs, rather than maximising the cheque.
- ✗A higher valuation is always the best deal. Headline valuation is only part of the term sheet. Liquidation preferences, option-pool sizing, and board control can matter more than the pre-money number for what founders actually keep.
Revision bullets
- •Post-money equals pre-money plus the new investment
- •Ownership percentage equals investment divided by post-money
- •Dilution lowers your percentage as new shares are issued
- •A thinner slice of a bigger pie can still be worth more
- •The cap table records ownership after every round
- •Bigger is not automatically better. Weigh cash against dilution
Quick check
An investor puts A$3 million into a startup at a A$9 million pre-money valuation. The investor’s ownership percentage is
A founder owns 40 percent before a new round that raises capital at a A$30 million pre-money and A$40 million post-money. After the round the founder owns
Connected topics
Sources
- Cremades (2016), Ch. 7Cremades, A. The Art of Startup Fundraising. Wiley, 2016. ISBN 978-1-119-19183-5.Explains pre-money and post-money valuation, ownership, the cap table, and dilution across rounds.
- Brailsford, Heaney & Bilson (2015), equity valuationBrailsford, T., Heaney, R., & Bilson, C. Investments: Concepts and Applications. 5th ed. Cengage Learning Australia, 2015.Grounds the ownership and valuation arithmetic in equity-financing principles.