Before we start a discussion on the different terms of a venture capital financing, it is important that every startup seeking VC financing understand the basic language of valuation. What does the VC mean when he says that he is ready to make an investment based on a “pre-money valuation of $8 million” or a “post-money valuation of $10 million.” Or if the VC tells you that he will put in “$2 million based on an $8 million valuation, giving a $10 million post-money.”
Pre-money valuation is the valuation of the company prior to the investment. Post-money valuation is the valuation of the company after the investment.
For example, assume that TechStartup, Inc. was given a pre-money valuation of $8 million. If Sandy Hill Ventures was interested in investing a total of $2 million, the post-money valuation would be $10 million.