Pre-Money Valuation

You're a private company. You need to raise $5 million to invest in your startup. You don't want to raise that money as debt; you don't have cash flow yet. So you can't pay interest. You want to sell ownership in your company (shares) to raise that dough.

The question: what percent of your company must you sell to raise the $5 million?

Well, if the pre-money valuation was $5 million, to raise $5 million of cash, you'll have sold half the company to raise that money. Massive dilution to the original owners. The $5 million of cash will go in to produce a company with a $10 million post-money valuation. If you had a pre-money valuation of $45 million, then raised $5 million, you'd have $50 million in post-money valuation, and you'll have sold 10% of it to raise the dough. Obviously, the higher the pre-money valuation, the less percent dilution you'll suffer in raising that $5 million.

Regardless, remember that, most of the time, investors get their cash money back first when the company is sold. So if you sell the whole thing for $6 million, the cash investor gets $5 million, and then all the rest of the players involved split $1 million.

Yeah, not a lot for you to retire on.

See: Participating Preferred. See: Vanilla Terms. See: Liquidity Preference.