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 firm’s value after boosting the capital flow in the company. At any point in time post-fund infusion, post-money valuation shows the company’s worth that can be fetched from the market.
Fund infusion is an all-time high requirement of all corporations. Valuation, due diligence, and post facto effect analysis are the key tasks to perform before infusing any company funds.
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Source: Post Money Valuation (wallstreetmojo.com)
Post-Money Valuation Formula
Post-money valuation = Value of capital post-infusion
Post-money valuation = New investment * (Total post-investment number of shares outstanding /Shares issued for new investment)
Thus, increase in value due to fund infusion = Vpost – Vpre
Where,
- Vpost = Value of the firm post-money injunction
- Vpre = Value of firm pre-money injunction
Examples of Post Money Valuation
The following are examples that need to be considered:
Example #1
Bank of America has a common share capital of $1,000,000 and requires additional capital of $250,000. Therefore, the company issues extra money worth $250,000. Mr. A. was holding 5% equity before giving the share. Please calculate the post-money value of Bank of America and Mr. A.
Solution:
Value of Bank of America post-money injunction = $1,000,000 + $250,000 = $1,250,000.
Mr. A. had 5% equity before issuing of a shareIssuing Of A ShareShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more, thus the 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
Example #2
Wells Fargo’s net worth is $60,000,000 – consisting 6,000,000 shares of $10 each. He needed $10,000,000 to restructure the business. Thus, Wells Fargo obtained funding by issuing 10,00,000 shares to the lender. Pre-money EPS is $4. At the same time, post-money EPS is $3.5. Calculate the post-money value and increase in value due to fund infusion.
Solution:
- 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
Example #3
XYZ Ltd. 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.
Solution
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 million.
At Round 2
Post-money valuation = New investment * (Total post-investment number of shares outstanding /Shares issued for new investment)
- = $21 million * (7.1 million shares/2.1 million shares)
- = $71 million
At Round 3
- = $25 million * (9.6 million shares /2.5 million shares)
- = $96 million
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 can be identified.
- #2 – Ensure safeguarding of interest – All the business transactions have one or more impacts 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 the ability of the company to repay it. It will also ensure the business interest of all the stakeholders.
- #3 – Maintains confidence of stakeholders – In post-money valuation, will conduct all scenario analysis for a clear picture of the company’s performance, allowing stakeholders to sustain their interest in its financial viability.
Factors to be Considered While Doing Post Money Valuation
To calculate the value of the firm is a highly complex task. For 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 company and plays a pivotal role in creating market sentiments and building stakeholder confidence.
- #2 – Current capital structure and potential equity conversion – While doing pre-and post-money analysis, one must keep in mind the company’s existing equity component and debt obligations. Along with that, one has to consider the potential equity in the company in the form of ESOP, convertible instruments, and other contractual obligations, which can be converted into equity due to some non-compliance.
Limitation in Valuation
There are various methods to do the valuationVarious Methods To Do The ValuationDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company.read more. Each method has its own merits, set of assumptions, and way of calculation. In addition, with a change in an expert, the usage of methods will change, and as a result, valuation figures will also change. Therefore, the amount that arrives is highly subjective.
Conclusion
Post-money valuation is the post-transactional analysis of corporate health. Depending on such evaluation, the company can determine its operating ability based on the fund infused. Moreover, such valuation acts as MIS for the top management to check the merits and demerits arising from such a fund injunction.
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This article 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 and explanations. You can learn more about private equity from the following articles:-
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