Pre and Post money refer to the value of an investment opportunity, say a company, before and after funds are invested. These terms come up when calculating exactly what an investor’s ownership percentage will be, as the infusion of capital will effectively change the size of the “pot.”

Q. What are these terms?
A. These are really crucial terms from VC, PE, angel investing worlds. They refer to the valuation of a company before an investment is made, on the one hand; and after its made, on the other. It’s a funny thing to say, maybe, but when you’re having a conversation about investing in private companies, it’s really important to be clear about which number you mean: pre-money or post-money.

Q. But what exactly are the terms used for?
A. To determine what percentage of the company I’m going to own for my investment. Very technically pre and post money formulas are used to figure out the price per share of my investment.

Q. So, I guess you can imagine I’m going to ask for an example.
A. Let’s say I have a startup and I need $2mm to get through the next year. You say, OK, fine, I’ll give you $2mm for 33% of the company. So immediately after the deal, you’ll own one-third of the company for your investment; thus, the post-money valuation is $6mm.

Q. And I guess the pre-money valuation would therefore be $4mm: the post money valuation minus the actual dollars invested.

A. Exactly. The best way to think about these terms is to figure out what % the investor will get for his investment, and do the math to get to the post-investment valuation; and then subtract the cash investment to get to the pre-money valuation.

Q. And where do the wires get crossed in discussing these terms?
A. Very basically, when a prospective investor asks the business owner, what’s the valuation of the company? In this example, if the entrepreneur answers: $6mm, but he means pre-money, the investor would only wind up with of 25% the company (because the post would be 8, and 2 is one-fourth of that), not 33%.

Q. So, obviously, that’s a critical threshold question to nail down in the first conversation.
A. It certainly is. Now, arguments about valuation for very early stage companies are can be difficult to solve, because there’s just so much you don’t know yet about how the company will do. As you’ll recall, we did a buzzword a while back on “next round notes,” which involves the use of convertible notes to push the valuation discussion off till later institutional financing rounds come in.