Post-Money Valuation

What is the post-money valuation?

Post-money valuation (valuation after the funding round) describes the agreed value of all shares in a company immediately after new capital has flowed in. It equals the pre-money valuation, that is, the value before the round, plus the investment amount. It determines the ownership stake of the new investors: investment amount divided by post-money valuation. The German term is Post-Money-Bewertung.

The addition has a simple reason. In a capital increase, the money does not go to the founders but into the company. Afterwards, the company owns everything it had before and, in addition, the new contribution. A comparable case is a sailing boat that belongs to three owners and is valued at EUR 90,000. If a fourth person pays EUR 30,000 into the common fund, the common assets afterwards amount to EUR 120,000, and that person owns a quarter of them.

Arithmetically, the post-money valuation is the product of the price per share of the round and the number of all shares after the round. Counting is usually done on a fully diluted basis (Fully Diluted Valuation), that is, as if all promised future shares, for example from employee programmes and convertible loans, had already been issued. In the term sheet, the document setting out the key terms of the round, it is either agreed directly or derived from the pre-money valuation. Externally it is usually the figure by which a round is described, and for those involved it is the benchmark for the next round.

Calculating the post-money valuation: formula and ownership stake

Formula: post-money valuation = pre-money valuation + investment amount

Three further relationships follow from this:

• Post-money valuation = price per share × number of all shares after the round
• Investor's stake = investment amount / post-money valuation
• Investment amount = target stake × post-money valuation

The calculation can be done from either side. If the parties agree on the investment amount and the target stake, the post-money valuation follows: EUR 4 million for 20% gives EUR 20 million. If they instead agree on the pre-money valuation, the stake results only from the sum of both amounts. In both cases the stake refers to the fully diluted basis, not to the share capital (Stammkapital), that is, the sum of the nominal amounts entered in the commercial register (Handelsregister).

The post-money valuation assumes that every share has the same value. In fact, the investors' new shares usually carry a liquidation preference and are served first in a sale. The post-money valuation is therefore rather a price extrapolated to all shares than the market value of the entire equity. A buyer who later acquires all shares first values the operating business (enterprise value). From this, via debt and cash, the buyer derives the price for the shares (Equity Bridge).

Agreement on a post-money basis

If a round is agreed on a post-money basis, the parties fix the valuation after the round, and with it the investor's amount and stake, before all other items of the capital structure have been clarified. Any additional dilution from an increase of the employee pool, that is, the shares reserved for employees, from convertible loans or from previously unknown commitments is then borne solely by the existing shareholders. This also applies to items that become known only after the term sheet has been signed.

Convertible instruments, that is, financings that are later converted into shares, follow the same logic when their valuation cap (Valuation Cap) is set as a value after the round. In the US market this is common with SAFEs (Simple Agreement for Future Equity, a promise of future shares against immediate payment). There the investor's stake is fixed, and further convertible instruments dilute only the existing shareholders. German convertible loans regulate the reference point of the cap in different ways; the wording of the contract is decisive.

From the valuation to the shareholder list

For a GmbH (German limited liability company), the post-money valuation is not entered anywhere. The commercial register shows only the increased share capital, and the shareholder list (Gesellschafterliste) shows the shares with their nominal amount and percentage holding in the share capital (Section 40(1) of the German Limited Liability Companies Act, GmbH-Gesetz, GmbHG). The valuation is reflected solely in the additional payment that the investor makes into the capital reserves over and above the nominal amount, usually EUR 1 per share.

The percentages in the shareholder list therefore differ from the percentages of the post-money valuation. Virtual shares and instruments not yet converted are missing from the list, and the investor's stake in the share capital is above its fully diluted stake. For voting rights the shareholder list counts, because each euro of a share carries one vote (Section 47(2) GmbHG). For the distribution of sale proceeds, the fully diluted view including the preferences counts, as shown by the cap table.

The benchmark for the next round

If the follow-on round takes place at a higher price per share, it is called an up round, at the same price a flat round and at a lower price a down round. A down round generally triggers the contractually agreed anti-dilution protection of earlier investors, which gives them additional shares. What matters is the price per share, not the overall valuation: if many new shares have been created between two rounds, a higher pre-money valuation can nevertheless mean a lower price per share.

Because the next round is meant to exceed today's post-money valuation, a backward calculation is worthwhile. From the targeted valuation of the follow-on round and an assumed revenue multiple (Revenue Multiple), the revenue that the company must reach by then results. If valuation levels in the market fall in the meantime, this target rises accordingly.

Worked example: calculating the post-money valuation with a convertible loan

A GmbH has 54,000 shares with a nominal amount of EUR 1 each and 6,000 allocated virtual shares, together 60,000 shares on a fully diluted basis. A convertible loan of EUR 1.2 million converts in the round at a 20% discount on the price per share. The lender thus receives its shares 20% cheaper than the new investor. The new investor pays EUR 6 million for 20% on a fully diluted basis after the round.

• Post-money valuation: EUR 6 million / 20% = EUR 30 million; pre-money valuation: 30 minus 6 = EUR 24 million
• Conversion shares: the lender receives shares worth EUR 1.2 million / 0.8 = EUR 1.5 million at the round price, that is, 1.5 / 30 = 5% of the shares after the round
• The existing 60,000 shares therefore correspond to 100% minus 20% minus 5% = 75%; total shares: 60,000 / 0.75 = 80,000
• Price per share: EUR 30 million / 80,000 = EUR 375; conversion price: 80% of EUR 375 = EUR 300
• New shares: investor EUR 6 million / EUR 375 = 16,000, lender EUR 1.2 million / EUR 300 = 4,000; check: 60,000 + 16,000 + 4,000 = 80,000
• Fully diluted stakes: existing shareholders 54,000 / 80,000 = 67.5%, virtual shares 7.5%, lender 5%, investor 20%
• Investor's additional payment into the capital reserves: 16,000 × EUR 374 = EUR 5,984,000 in addition to EUR 16,000 nominal amount
• Shareholder list after registration with share capital of EUR 74,000: investor around 21.62%, lender around 5.41%, existing shareholders around 72.97%
• Follow-on round: if 10,000 pool shares are added by then, a price of at least EUR 375 requires a pre-money valuation of 90,000 × EUR 375 = EUR 33.75 million. A pre-money valuation of EUR 32 million would be above today's EUR 30 million but would be a down round, because EUR 32 million / 90,000 = around EUR 355.56 per share.

The pre-money valuation of EUR 24 million is spread over 64,000 shares including the conversion shares. The lender's discount, 1.5 minus 1.2 = EUR 0.3 million at the round price, is borne by the existing shareholders and the holders of virtual shares, because the new investor's amount and stake are fixed. For the holders of shares this means: their fully diluted share falls from 54,000 / 60,000 = 90% to 67.5%, although the new investor receives only 20%.

Distinctions: post-money valuation, pre-money valuation and purchase price

• Pre-money valuation: the value before the round. Together with the number of shares before the round, it determines the price per share; the post-money valuation is the sum of it and the investment amount.
• Fully diluted valuation: the valuation on the basis of all existing and future shares. Post-money valuations are usually understood this way in practice.
• Purchase price in a company sale: the price an acquirer pays for all shares. It is derived from the value of the operating business and can be above or below the last post-money valuation.

Common mistakes

• Post-money read as pre-money. If EUR 4 million is committed at a pre-money valuation of EUR 16 million, the investor receives 20%; if the EUR 16 million is treated as the post-money valuation, it is 25%.
• Stake in the share capital confused with the fully diluted stake. Anyone who calculates with the percentages of the shareholder list overestimates the economic share of the shareholders.
• Post-money fixed without a complete capital structure. If a pool increase or convertible loans are quantified only after the term sheet, the additional dilution falls entirely on the existing shareholders.
• Overall valuation compared instead of price per share. A higher valuation in the follow-on round can mask a down round if the number of shares has risen.
• Valuation stretched without a backward calculation. A post-money valuation that cannot be supported by metrics by the next round often leads to a flat round or down round.

Frequently asked questions

How is the post-money valuation calculated?

As the pre-money valuation plus the investment amount. A pre-money valuation of EUR 24 million and an investment of EUR 6 million give EUR 30 million; deducting the investment amount leads back to the pre-money valuation. If only the stake is fixed, the rule is: investment amount divided by stake.

Which valuation is quoted in reports on funding rounds?

Usually the post-money valuation. In negotiations, by contrast, the pre-money valuation is mostly discussed, because it expresses the value of the existing shares.

Is the post-money valuation the value at which the company could be sold?

No. It extrapolates the price of the new shares, which carry preferential rights, to all shares. An acquirer values the company independently, and the distribution of its purchase price follows the agreed preferences.

How much dilution is usual per round?

As a rule of thumb, 10 to 25% on a fully diluted basis depending on the stage. Considerably higher values suggest that the round is very large in relation to the valuation (Dilution).

What is a flat round?

A follow-on round at the same price per share as the previous one. It does not trigger anti-dilution protection but is read by investors as a sign that the expectations of the last round have not been fully met.

The Roemer Capital view

For every round it accompanies, Roemer Capital calculates the post-money valuation back to metrics. They show what must have been achieved by the next round for an investor to pay a higher price per share. The basis is the financial model with a base case, a conservative case and an optimistic case. If the target is within reach only in the optimistic case, Roemer Capital addresses this openly in the negotiation on the valuation.

Before the notarial recording, Roemer Capital presents all parties with two statements side by side: the fully diluted stakes after the round and the stakes in the share capital as they will appear in the new shareholder list. This clarifies before the notary appointment why the two differ and which figure applies to voting rights and which to the distribution of proceeds.