Pre-Money and Post-Money Cap Table - Explained
What the Pre-Money Cap Table and Post-Money Cap Tables
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Table of ContentsWhat are Pre-money and Post-Money Cap Tables?How are Pre-Money and Post-Money Cap Tables Used?Academic Research on Pre-money and Post-Money Cap Table
What are Pre-money and Post-Money Cap Tables?
Pre-money valuation references a company's value that does not include the most recent round of financing or external funding. Post-money valuation includes external funding or the most recent capitalization. A cap table specifies the ownership of a startup and what each individual owns.
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How are Pre-Money and Post-Money Cap Tables Used?
Pre-money valuation is a term that refers to a company's valuation or asset before receiving financing or investment. It's used extensively in venture capital industries or private equity. Post-money valuation gets applied to the sphere of startups and is the value of a company following capital injections or external financing.A cap table is a spreadsheet used by a startup company or venture in its early stage which details all the securities of the company, such as preferred shares, common shares, warrants, their owners and the amount the investors paid for these securities. It shows each investors ownership percentage of the company, their securities value, and dilution with time.
Cap tables are created in the early stages of a startup or venture before any other company documents. The cap tables become complex after several rounds of financing and it specifies prospective funding sources, initial public offerings (IPOs), acquisitions and mergers, and other activities.Many entrepreneurs make the mistake of believing their pre-money valuation determines their ownership percentage of the firm but they forget seed debt and its discount and option pool shuffle. In the end, they blame their lawyers.
Many companies use spreadsheets to make a cap table at the start of the business. It should have a simple design and organized layout plainly indicating who own specific shares and the number of shares that are outstanding. The most popular structure is to list the security owners and investors on the Y-axis and then have the securities on the X-axis.
Pre-money and post-money cap tables differ based on when the valuation occurs. Both are measures of valuation for the company. Pre-money valuation points out the value of a firm that doesn't include external funding and post-money valuation involves outside financing. Since they are vital concepts in valuation, it is important to understand which is being referenced.
To explain the difference, look at this example. An investor wants to invest in a tech startup. Both the investor and entrepreneur settle on the company's worth at $1 million. The investor gives $250,000.The percentage of ownership with be contingent on if it is a $1 million pre-money or post-money valuation. If it is pre-money, the value of the company is $1 million before the funding. The post-money valuation will value the company at $1.25 million because the $250,000 investment is taken into consideration.The specific valuation method used can impact the percentages of ownership immensely because of the value of the company being placed before investment. If the company has a value of $1 million, pre-money valuation is worth more than post-money because it does not include the $250,000 invested. It affects the entrepreneurs ownership by only 5 percent, but if the company goes public, it could represent millions of dollars.
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