The importance of valuation in fundraising, highlighting its role as a price tag and market signal for a business.
The importance of valuation in fundraising, highlighting its role as a price tag and market signal for a business. It discusses how valuation typically increases through different financing rounds, impacting equity holdings as the business scales.
hello everyone this is alejandro crematis and today we're going to be talking about what is the difference between pre-money valuation and postman evaluation [Music] so there's a lot out there in terms of what is pre-money valuation what is post-money valuation but here's the thing the valuation itself is super critical especially as you're thinking about the business itself as a founder or perhaps as an investor so in today's video we're going to break it down we're going to give you all the insights so that by the end of the video you're going to have a clear understanding of what is the pre-money valuation and what is the post-money valuation and then why the valuation itself is so important for you so with that being said let's get into it so why are the valuations so important the valuation is super important because it's really that price tag is a way to really signal to the market
obviously the more that the business grows the more that the valuation is going to be but essentially the valuation is going to send a signal to the market so that people understand what is ultimately the value of the business so that happens again during the multiple fundraising rounds that you're going to do ideally you go from c to series a to series b to series c and beyond which are the different type of financing cycles and from financing cycle to financing cycle the valuation grows what that means is that the people that hold the shares of the business they may hold a less amount of equity as you continue to scale up and as you continue to mature the business but obviously the more that you scale the hope is that the more also the valuation increases in parallel uh also on the acquisitions basically is the price tag that they're going to be giving that is going to be buying
everyone out and really providing the returns and the cash for you or the stock for you and for the investors that have invested in your business so what is the pre-money valuation so the pre-money valuation in essence is the value of the business before the money is injected either from investments or perhaps from an acquisition so is the value of that company that has been established via one of the multiple methods to really establish a valuation and that is pricing it for the next course of action to happen now some of those methods i mean traditionally you were basically calculating the ebitda i mean it was it was like certain multiples to it but when you are let's say a hyper growth business or you are looking at other things that are not specifically related to the ebitda you can find some of these options the berkus method the scorecard method the venture capital method the first
chicago method the risk factor summation so what is the post money valuation the post money evaluation as the name says it is the value of the business after that investment has come in so basically if we were to put it into an example let's say that the value of your business is pre-money valuation of your business let's say it's 10 million and you're asking for uh let's say 2 million investment so essentially the post money valuation is the 10 million from the pre-money valuation with that 2 million that is being invested and as a result you're looking at 12 million and that 12 million is the post money valuation so in terms of debt and valuation you need to understand that typically the depth is going to be taken outside of what the valuation is now there are certain cases like for example if you have let's say convertible notes that are converting into equity that could affect the
post money evaluation because if we take a look at the post money evaluation example where you got 10 million dollar volume 2 million dollars of money that is actually invested if you had convertible notes obviously that 2 million is going to trigger those nodes to convert into equity so what's going to happen is that if you have let's say to put an example 1 million in convertible nodes that had been invested before this 2 million investment what's going to happen is that your post money evaluation is not going to be the 12 million that we were talking before it's going to be 13 million because you're adding that million as well so essentially in this case that convertible note is going to impact the post-money evaluation that you're going to have in the end when it comes to valuation and terms ultimately you want to make sure that you are not the first one talking because investors are
going to ask you what is the value of your business now the minute that you're talking and that you are disclosing the valuation remember they're going to negotiate you down they're going to always negotiate a price under that's why even if you have a valuation that you've done on your business maybe with a company that has helped you to to do this a service provider you want to keep that number that valuation very tight to your best because what you want to do is you want to turn it around you want to give it back to the investor and you want to let them do the talking first because what you would do then is negotiate them up not the other way around otherwise you're putting yourself in a really difficult situation the other thing is that you need to also keep into consideration the fact that having an equity incentive pool or an equity incentive plan to pay in stock to some of your
employees via stock options that is going to be required by the investor before you actually do the financing round typically what i'm seeing now in the market and obviously you want to consult this with your corporate lawyer is equity incentive plans that go between 15 to 20 and that's going to be of the equity now again remember to have this in place before you go into the round of financing otherwise you're going to be the bottleneck and the last thing that you want is to really hold up on the process of getting that money in or whatever that is so i would love to hear in the comment section below how you're thinking about the evaluation process and again like this video and subscribe to the channel so that you don't miss out on all the videos that we're rolling out every week and as well take a look at the fundraising training which is the program where we help from a to c with
everything related to fundraising and i'll find that you would really see a tremendous amount of value in it so thank you so much for watching