Private Equity Tutorials
- Private Equity Basics
- What is Private Equity?
- Private Equity Analyst
- How to Get Into Private Equity?
- Private Equity Interview Questions
- Post Money Valuation
- What is Growth Capital?
- Term Sheet in Private Equity
- LP vs GP
- General Partner in Private Equity
- Carried Interest in Private Equity
- Clawback in Private Equity
- Preemptive Rights
- Drag-Along Rights
- Types of Alternative Investments
- Private Equity vs Hedge Fund
- Project Finance vs Private Equity
- Private Equity Books
- Venture Capital Books
Post-Money Valuation Definition
Post-money valuation means assessing the company’s worth post capital injunction in the company. In simple terms, Post-money valuation is to check the value of the firm, which will be after boosting the capital flow in the company. At any point in time post fund infusion, post-money valuation shows the worth of the company and that can be fetched from the market.
Fund infusion is all time high requirement of all the corporates. Valuation, due diligence, and post facto effect analysis are the key task to be performed before infusing any funds in the company.
Post-Money Valuation Formula
Post Money Valuation = Value of Capital Post Infusion
Thus, Increase in value due to Fund Infusion = Vpost – Vpre
- Vpost = Value of the firm post money injunction
- Vpre = Value of firm pre-money injunction
Examples of Post Money Valuation
The following are the examples need to be considered:
Bank of America has a common share capital of $ 1,000,000. The bank is in need of additional capital of $ 250,000. Therefore, the company issues additional capital worth $ 250,000.Mr A was holding 5% equity before issuing of the share. Please calculate the post-money value of Bank of America and of Mr A.
Value of Bank of America Post Money = $ 1,000,000 + $ 250,000 = $1,250,000
Mr A was holding 5% equity before issuing of a share, thus Pre Money valuation of Mr A
- = $ 1,000,000 * 5%
- = $ 50,000
- = $ 1,250,000 * 5% = $ 62,500
Thus, increase in value of the company post money = $1,250,000 – $ 1,000,000 = $ 250,000
Therefore, the calculation of increase in portfolio will be as follows,
= $ 62,500 – $ 50, 000
Increase in portfolio of Mr A = $ 12, 500
Wells Fargo’s net worth is of $ 60,000,000 – consisting 6,000,000 shares of $ 10 each. Wells Fargo was in need of $ 10,000,000 in order to restructure the business. Thus, Wells Fargo obtained funding by issuing 1000,000 shares to the lender. Pre-money EPS is of $ 4. While post money EPS is $ 3.5. Calculate the post-money value and increase in value due to fund infusion.
- Pre-money valuation: 6000,000 shares * $ 4 = $ 24,000,000
- Post Money Valuation: (6000, 000 + 1000, 000) shares * $ 3. 5 = $ 24,500,000
Therefore, the calculation of the increase in a portfolio will be as follows,
= $ 24,500,000- $ 24,000,000
Increase in Value = $ 500, 000
XYZ limited is a start-up. It has obtained a series of funding from investors based on business growth needs. The breakup of the same is as follows:
Calculate the post-money value of the company at the end of each round of funding.
At Round 1
The first-time company acquired the fund. Hence, Pre-money valuation and Post money valuation will be the same. Hence, the value of investment of Mr. B is equal to $ 13 Mn.
At Round 2
Post Money Valuation = New Investment * (Total Post Investment number of Shares outstanding /Shares issued for new investment)
- = $ 21 Mn * (7.1 Mn shares/2.1 Mn shares)
- = $ 71 Mn
At Round 3
- = $ 25 Mn * ( 9.6 Mn Shares / 2.5 Mn Shares)
- = $ 96 Mn
Advantages of Post Money Valuation
- #1 – To obtain the Real Value of the Firm – The real value of the firm is highly essential to assess at every specific point of time and as a result, with the help of Post money valuation, the real value will be identified
- #2 – Ensure Safeguarding of Interest – All the transaction of the business will be having one or more impact on business. On obtaining any lending from the financial institution or corporates, it is always inevitable to check the viability of the business interest and ability of the company to repay it. This will ensure the business interest of all the stakeholders
- #3 – Confidence of Stakeholders will be Maintained – As all scenario analysis will be done in post-money valuation, a clear picture of the company’s performance, stakeholders will be able to maintain their interest in the company’s financial viability.
Factors to be Considered while Doing Post Money Valuation
To calculate the value of the firm is a highly complex task. In order to arrive at the correct value of the firm post-money, the following factors are to be considered:
- #1 – Current Market Price – Corporate valuation is highly dependent on the stock market performance of the shares of the company, as it plays a pivot role in creating market sentiments and in building confidence in stakeholders.
- #2 – Current Capital Structure and Potential Equity Conversion – While doing pre and post money analysis, one has to keep in mind the existing equity component and debt obligations on the company. Along with that, one has to consider the potential equity in the company in the form of ESOP, convertible instrument and other contractual obligations, which can be converted into equity due to some noncompliance.
Limitation in Valuation
There are various methods to do the valuation. Each method has its own merits, set of assumptions and method of calculation. With a change in an expert, usage of method will change and as a result, valuation figures will change. Hence, the amount that is being arrived is highly subjective in nature.
Post Money valuation is the post transactional analysis of corporate health. Company’s operating ability based on the fund infused will be determined based on such evaluation. Moreover, such valuation acts as MIS for the top management to check the merits and demerits that are arising out of such fund injunction.
This has been a guide to Post Money Valuation and its definition. Here we discuss how to calculate Post Money valuation using its formula along with practical examples & explanations. You can learn more about Private Equity from the following articles –