When we are analyzing a new company, we will have a post-money value and a pre-money value. The post-money value is the present value of the estimated exit value of the company. The pre-money is the difference between the post-money value and the investment amount.
POST = PV(exit value)
PRE = POST – INV
These two concepts are important when we are trying to determine the number of new shares to issue to the venture capitalist making an investment.
where:
f = INV/POST
If multiple rounds of process are involved, we must do the process multiple times, with discounting. For instance, for two rounds of financing, we discount calculate the post-money value during the second round, which leads to the pre-money value during the second round. This is discounted to get the post-money value for the first round.
After the second round, the first-round investor’s share dilutes from ƒ1 to ƒ1(1 − ƒ2).
