Meaning
Negotiation of the worth of a startup occurs before any new capital from an investment round is added to the balance sheet. This pre money valuation establishes how much of the company an investor will receive in exchange for their contribution. It represents the primary point of negotiation during a fundraise and is built upon the perceived worth of the team, the technology, the revenue and the current market opportunity available to the business.
Investment Basis
Determination of the price per share relies on this initial figure. The pre money valuation is divided by the number of shares currently in existence to find the cost of a single unit of equity. This calculation excludes the impact of the cash that is about to enter the firm.
Share Allocation
Dilution for existing owners is a direct result of how this number is set. A lower pre money valuation means the founder must give away more of the company to secure the same amount of money. This outcome impacts the long term control the original team maintains over the board and the strategy.
Negotiation Leverage
Market trends and previous revenue performance influence the final agreement. The pre money valuation functions as a proxy for the risk an investor is willing to take. It represents the point where the cost in energy spent on fundraising finally yields the resources needed for operations.
