One of the concepts that aspiring startuppers have to deal with when seeking capital for their business is that of pre-money valuation: we talked about it in the dedicated article, but to get a complete picture of the topic, one needs to understand the difference between pre-money and post-money value of a company.
Pre-money value: what is it?
Pre-money value is a snapshot of the company at a given moment in time before a capital injection. It is a value that takes into account, therefore, the company's capital stock, its achievements up to that point in time, in terms not only of customers and revenues, but also team composition, market testing, strengths, resources acquired, and future prospects (scalability of the business, market breadth, etc.). For startups, which often do not yet have a history of economic data, pre-money valuation is based primarily on qualitative data and financial projections.
Defining the pre-money value before a financing round is very important because with that value, the potential of the company is communicated to investors, and on the basis of it the price of the shares is set: the premium is calculated by making the ratio between the company's share capital and its pre-money value. The wider the gap, the more promising the company looks and therefore the higher the premium investors will have to pay to buy its shares. In the case of institutional investors, the pre-money value may be subject to negotiation and come to differ from the value initially set by the company.
Doing an accurate pre-money valuation is crucial for the company to strike a balance between recognizing fair value, attractiveness to investors, and not too much dilution of share capital.
For investors, in turn, knowing the pre-money value is critical to know what the share they are buying is worth. To know this accurately, however, one must also know the post-money value.
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Post-money value: what is it?
The difference between pre-money value and post-money value is that the latter is obtained after a round of financing and therefore indicates what the company is worth after an injection of capital, from whatever source it comes.
The calculation of the post-money value is very simple: just add the pre-money value to the capital raised from investors.
Based on this value, it is possible to calculate the corporate percentage that each investor owns. The corporate share acquired, in fact, corresponds to the nominal value of the investment divided by the post-money value.
Let's take a practical example.
Pre-money valuation: €1,000,000
Capital increase: €200,000
Post-money valuation: €1,200,000
X investment (nominal value): €12,000
X investor's share: 12.000€/1.200.000€ = 1%
Following the capital increase, investor x owns 1 percent of the company.
The importance of company valuation for equity crowdfunding
Before doing an equity crowdfunding campaign, each company must calculate-or have an advisor or agency calculate-its pre-money valuation. This figure is then verified by the crowdfunding platform that will host the campaign, to verify the reliability of the proposal to be offered to investors.
The pre-money value, in fact, must appear publicly on the campaign page, to give potential investors a way to make an estimate of the shares they are about to buy and future earnings opportunities.
To turn potential investors into investors, however, it is not enough to have a good pre-money valuation: investment in equity crowdfunding is risky, it does not give certainty of earnings and the prospect of a return on capital is, in any case, shifted far forward in time. One must, therefore, offer an immediate return that mitigates the risk of the investment and adds attractiveness to participation in the campaign : we are talking about rewards.
Rewards are exclusive rewards reserved for those who invest in the equity crowdfunding campaign, designed to offer something unique and very attractive to the campaign's ideal target audience-the company's customers or potential customers. The latter are the best potential investors because they already have a connection to the company and its product or service: it is easy, therefore, to offer them a motivation for investment to go along with the pre-money value and the company's business plan. Especially since, as important as documents and technical data are, most nonprofessional (or unsophisticated) investors do not have the skills to fully understand them and need a more concrete stimulus.
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