Post Money Valuation

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Post-Money Valuation Definition

Post-money valuation means assessing the company’s worth post capital injunction in the company. In simple terms, post-money valuation is to check the firm’s value after boosting the capital flow in the company. At any point in time post-fund infusion, post-money valuation shows the company’s worth that can be fetched from the market.

Fund infusion is an all-time high requirement of all corporations. Valuation, due diligence, and post facto effect analysis are the key tasks before infusing any company funds.

Post-Money Valuation Definition

Post-money valuation is the method of representing the company's value after it invests. This valuation is the value equal to the pre-money valuation sum and the new equity amount.
The post-money valuation helps to obtain the firm's actual value, ensures the safeguarding of interest, and retains stakeholders' confidence.
One must consider these two factors while conducting a valuation: 1. current market price 2. capital structure and potential equity conversion.
There are various methods of valuation. Therefore, each method has merits, assumptions, and ways of calculation. As a result, the amount that arrives is highly subjective.

Post-Money Valuation Formula

Post-money valuation = Value of capital post-infusion

Post-money valuation = New investment * (Total post-investment number of shares outstanding /Shares issued for new investment)

Thus, increase in value due to fund infusion = V_post – V_pre_Where,

V_post = Value of the firm post-money injunction
V_pre = Value of firm pre-money injunction

Examples of Post Money Valuation

The following are examples that need to be considered:

Example #1

Bank of America has a common share capital of $1,000,000 and requires additional capital of $250,000. Therefore, the company issues extra money worth $250,000. Mr. A. was holding 5% equity before giving the share. Please calculate the post-money value of Bank of America and Mr. A.

Solution:

Value of Bank of America post-money injunction = $1,000,000 + $250,000 = $1,250,000.

Mr. A had 5% equity before issuing of a share, thus the pre-money valuation of Mr. A.

= $1,000,000 * 5%
= $50,000
= $1,250,000 * 5% = $62,500

Thus, increase in value of the company post-money = $1,250,000 – $1,000,000 = $250,000.

Therefore, the calculation of the increase in the portfolio will be as follows:

= $62,500 – $50,000

Increase in the portfolio of Mr. A = $ 12,500.

Example #2

Wells Fargo’s net worth is $60,000,000 – consisting of 6,000,000 shares of $10 each. He needed $10,000,000 to restructure the business. Thus, Wells Fargo obtained funding by issuing 10,00,000 shares to the lender. Pre-money EPS is $4. At the same time, post-money EPS is $3.5. Calculate the post-money value and increase in value due to fund infusion.

Solution:

Pre-money valuation: 6000,000 shares * $4 = $24,000,000
Post-money valuation: (6000,000 + 1000,000) shares * $3.5 = $24,500,000

Therefore, the calculation of the increase in a portfolio will be as follows:

= $24,500,000- $24,000,000

Increase in value = $500,000

Example #3

XYZ Ltd. is a start-up. It has obtained a series of funding from investors based on business growth needs. The breakup of the same is as follows: –

Calculate the post-money value of the company at the end of each round of funding.

Solution

At Round 1

The first-time company acquired the fund. Hence, pre-money valuation and post-money valuation will be the same. Hence, the value of investment of Mr. B. is equal to $13 million.

At Round 2

Post-money valuation = New investment * (Total post-investment number of shares outstanding /Shares issued for new investment)

= $21 million * (7.1 million shares/2.1 million shares)
= $71 million

At Round 3

= $25 million * (9.6 million shares /2.5 million shares)
= $96 million

Advantages of Post Money Valuation

#1 – To obtain the actual value of the firm – The real value of the firm is highly essential to assess at every specific point of time. As a result, with the help of post-money valuation, the real value can be identified.
#2 – Ensure safeguarding of interest – All business transactions have one or more impacts on business. On obtaining any lending from a financial institution or corporates, it is always inevitable to check the viability of the business interest and the ability of the company to repay it. It will also ensure the business interest of all the stakeholders.
#3 – Maintains confidence of stakeholders – In post-money valuation, will conduct all scenario analyses for a clear picture of the company's performance, allowing stakeholders to sustain their interest in its financial viability.

Factors to be Considered While Doing Post Money Valuation

Calculate the value of the firm is a highly complex task. For the correct value of the firm post-money, the following factors are to be considered:

#1 – Current market price – Corporate valuation is highly dependent on the company's stock market performance and plays a pivotal role in creating market sentiments and building stakeholder confidence.
#2 – Current capital structure and potential equity conversion – While doing pre-and post-money analysis, one must keep the company’s existing equity component and debt obligations in mind. Along with that, one has to consider the potential equity in the company in the form of ESOP, convertible instruments, and other contractual obligations, which can be converted into equity due to some non-compliance.

Limitation in Valuation

There are various methods to do the valuation. Each method has its merits, assumptions, and way of calculation. In addition, with a change in an expert, the usage of methods will change, and as a result, valuation figures will also change. Therefore, the amount that arrives is highly subjective.

Conclusion

Post-money valuation is the post-transactional analysis of corporate health. Depending on such evaluation, the company can determine its operating ability based on the fund infused. Moreover, such valuation acts as MIS for the top management to check the merits and demerits arising from such a fund injunction.

Frequently Asked Questions (FAQs)

What is post-money valuation vs pre-money valuation?

Post-money valuation is the outside financing or the latest capital injection. In contrast, pre-money valuation is the company's value, excluding the latest round of funding or outside financing. It is a critical concept in the company's valuation as it helps determine its worthiness after it receives and invests the money. In contrast, pre-money valuation needs a better idea of the current business value. So instead, it gives each issued share value.

What is the safe post-money valuation cap?

The safe post-money valuation cap refers to the company valuation estimated containing issuable shares upon conversion. It differs from the safe pre-money valuation cap in some aspects. Investors consider a safe post-money valuation cap as it provides the capability to estimate the company ownership they can buy with their investment made.

What is the difference between 409a valuation vs post-money valuation?

The 409A valuation refers to the valuation conducted by compliance experts. It is measured at the defensive valuation range low end. The post-money valuation refers to the market value deferred between the venture capitalists and the entrepreneurs providing investments.

Is post-money valuation enterprise value?

The post-money valuation enterprise is an equity value. The business enterprise value is the whole company's value without taking its capital structure. Moreover, a financing round cannot influence a company's enterprise value. Therefore, the enterprise value remains constant while the post-money equity value of a company increases by the cash received value.