Pre-money valuation (PMV) :
Pre-money valuation (PMV) is an estimated value of a company/asset before it receives external funding or investment. This valuation helps determine the share price and the ownership percentage that new investors will receive in exchange for their investment.
What are the key aspects of Pre-Money Valuation?
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Investment
Companies discuss pre-money valuation during funding rounds, such as seed funding, venture capital investments, or private equity placements.
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Calculation
The formula for calculating the PMV is
Post-Money Valuation = Pre-Money Valuation + Investment Amount
To find pre-money valuation:
Pre-Money Valuation = Post-Money - Investment Amount -
Dilution of ownership
PMV helps understand the amount of ownership the existing shareholders will retain after onboarding new investors. The dilution of ownership is a key consideration in these transactions.
What is the importance of PMV?
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Negotiation
It is a critical point of negotiation between entrepreneurs and investors. A higher PMV is favorable for existing owners as it has less dilution of their ownership stake.
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Terms of investment
It affects investment terms, such as the number of shares to be issued to new investors and the percentage of ownership they will acquire.
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Resourcefulness
Helps determine company's value, helping to benchmark against industry standards and comparable companies.
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Company value evaluation
Without external funding, businesses tend to operate more efficiently and cost-effectively, often leading to leaner operations.
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Fundraising in the future
It affects fundraising rounds in the future as it sets a precedent for the company’s valuation graph.
What factors affect PMV?
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Market conditions
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Company’s performance
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Competition
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Intellectual property
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Management team