Tag Archive for Post money valuation

Equity Dilution in a startup

15 Jan, 2011  No Comment

Understanding dilution is critically important for an entrepreneur who has cofounders or who plans on raising venture capital money to help grow their startup.

Dilution refers to a decrease in the ownership position of a company. Equity is a primary criteria in venture capital investment and is the heart of venture capital. The concept of dilution is a major factor to consider in deciding upon a financing strategy. By definition, bringing in an equity investor means that that the new party will be taking part ownership of the company.

Concept of dilution was the backbone of very popular movie “Social Network” which dealt with equity among founders, friends and VCs.

Lets try to understand the concept from the scratch –

-Hitesh, vcBytes.com

Pre-money and Post-money valuation

24 Dec, 2010  No Comment

Pre-money valuation

What is Pre-money valuation? Pre-money valuation refers to the valuation of the company before an investor injects capital into the company. The post-money valuation of a company refers to the valuation of the company after an investor has injected capital into the company. Therefore, the post-money valuation of a company is always equal to the pre-money valuation plus the amount of capital injected by the investor.

In equation form -

1. Post-money valuation = Pre-money valuation + Investment amount

2. Purchase price per share = Pre-money valuation / Number of fully-diluted shares before investment

3. Number of new shares issued to investor = Investment amount / Purchase price per share


Example:

Corbyn Tech Ltd. currently has 5,000,000 common shares held by its founders, being 100% equity of the company.

It is agreed between Corbyn Tech Ltd. and Investor A that in the forthcoming Series A round, 1,000,000 common shares will be set aside for ESOP.

Therefore, the number of fully-diluted shares of Corbyn Tech Ltd. before the Series A round is 5,000,000 + 1,000,000 = 6,000,000.
Pre-money valuation:
Before financing, Investor A gives Corbyn Tech Ltd. a valuation of US$5,000,000.

Therefore, the pre-money valuation of Corbyn Tech Ltd. is US$5,000,000.
Purchase price per share:

Each share is valued at $5,000,000 / 6,000,000 = $0.83 (calculated on a fully-diluted basis).

-Guest Post by Ananth, Ananth is a Senior Analyst with a leading PE firm based out of Mumbai