Pre-money and Post-Money Cap Table Definition
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.
A Little More on What is Pre-Money and Post-Money Cap Table
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 investor’s 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 entrepreneur’s ownership by only 5 percent, but if the company goes public, it could represent millions of dollars.
References for Pre-Money and Post-Money Cap Table
Academic Research on Pre-money and Post-Money Cap Table
How well do venture capital databases reflect actual investments?, Kaplan, S. N., Strömberg, P., & Sensoy, B. A. (2002). More and more researchers are using two primary venture capital databases to examine venture capital (VC) fundings: Venture Economics and VentureOne. This paper compares real contracts in 143 venture capital fundings to their classifications in the databases, which are largely self-reported. The databases do not include about 15 percent of the funding rounds. They are not so successful in measuring milestone rounds.
Understanding price-based antidilution protection: Five principles to apply when negotiating a down-round financing, Bartlett III, R. P. (2003). Bus. Law., 59, 23. This article gives a constructive guide for using and understanding price-based anti-dilution protection, which is a fundamental financial term discussed by venture capitalists when creating a portfolio company investment. In the article, the author features a few of the most surprising and accidental consequences of regular anti-dilution formulas specifically on a company’s new funding. The article presents five principles to guide venture capitalists when bargaining an investment in a company with anti-dilution protection.
About Stock, Morris, S., Bootsma, O. E., & Wynne, A. About Stock. The slides explain what is a stock, founder stocks, and options. They explain how founder ownership gets determined and how much stock to issue. New cap tables are provided, along with valuation examples.
The pricing of successful venture capital backed high tech and life sciences companies, Advisors, H. V. (1998). Journal of Business Venturing, 13(5), 333-351. This article is the result of analysis and research managed by the joint efforts of VentureOne and Houlihan Valuation Advisors (HVA) to explain the difference in the value of venture capital-backed high tech and life sciences firms between the first equity funding round, which is typically at the inception date, temporary financing rounds, and their IPO or initial public offering. The authors have developed a useful procedure for the valuation of companies in growing technologies for securities pricing, such as equity and stock options.
The determinants of corporate venture capital success: Organizational structure, incentives, and complementarities, Gompers, P., & Lerner, J. (2000). In Concentrated corporate ownership (pp. 17-54). University of Chicago Press. The authors study a sample of 30,000 transactions. Investments in entrepreneurial companies from corporate ventures prove to be as successful as investments backed by independent venture firms. The premium that corporate venture capitalists invest in other firms does not show to be higher in investments that have a forceful strategic fit. Corporate programs that do not have a potent strategic focus do not appear as stable as strategically focused programs that seem as balanced as independent venture organizations.
Do VCs matter? The importance of owners on performance variance in start‐up firms, Fitza, M., Matusik, S. F., & Mosakowski, E. (2009). Strategic Management Journal, 30(4), 387-404. The authors study the impact of owners on how a firm performs in the framework of venture capital companies and the startups they invest in. They provide an analysis that divides the owner effect into a selection element that impacts investment and a management element that clarifies the discrepancy in performance. By studying the owner effect from how a startup is controlled and the relationship to venture capital owners, the authors’ examination adds to the understanding of the ownership effect.
Investing on hope? Small Cap and Growth Investing, Damodaran, A.The author gives a conventional definition of a growth investor, which describes the investor as one who buys high price to book ratio stocks or high price earnings ratio stocks. Then the author provides a generic definition which describes the investor as one who buys companies where the rate of growth possibility is underestimated. Both growth and value investors want to purchase stocks that are undervalued. The difference is where they believe they can obtain the bargains and what they consider as their strengths.
Valuation of high-risk high-technology ventures, Messica, A. (2006). The valuation of risky tech projects is more creative than it is a technique. The Discounted-Cash-Flow (DCF) method, which is commonly used in the valuation of conventional projects does not apply when there is no cash flow predictions and there is great uncertainty about whether Research & Development efforts will be successful upon completion. In this paper, the author presents a new model for venture-pricing and procedure for the valuation of technological ventures with high risk. The model will be useful to investors, entrepreneurs, and researchers, as well as C-level executives in charge of well-established corporations.
Valuing intellectual capital of innovative start-ups, Grajkowska, A. (2011). Journal of intellectual capital, 12(2), 179-201. The purpose of this study is to add to the theory of intellectual capital with a new valuation method of intellectual capital based on the concept of economic value added and introduce the Innovation Funnel that is a beneficial management tool and method for companies.
Crowdfunding: An Overview of Valuation Problems, Jegeleviciute, S., & Valanciene, L. (2014, September). In European Conference on Innovation and Entrepreneurship (p. 246). Academic Conferences International Limited. The goal of this paper is to expand the existing information about crowdfunding, which is an innovative way to connect investors to entrepreneurs. There could be missed opportunities and underestimation of the novel approach due to fears and other problems. There are strengths and weaknesses to crowdfunding. Some strengths are the opportunity to test marketability, benefits for communities, and the accessibility of capital. A few of the weaknesses include the possibility of ideas getting stolen, the potential for fraud, and accounting and administrative challenges. By broadening understanding of crowdfunding, entrepreneurs can have a useful way of raising money and investors can discover various investment opportunities.
The Pricing of Successful Venture Capital-Backed High Technology and Life Sciences Companies, Kam, S., & Witherow, D. (1999). The Journal of Private Equity, 15-28. This is an HVA and VentureOne study of 1,247 private financing for venture capital of over 400 electronic, biotechnology, software, and communications companies that went public between the periods of January 1993 a June 1997. The author points out the pricing and discusses the changes in corporate valuations between different rounds of funding and the IPO. The companies are arranged based on the stage of development, type of funding round, year of the initial public offering and industry. Statistical analysis and transactional analysis are used to interpret the data.