What Pre-Money and Post-Money Valuation Mean in a Term Sheet

Pre-money valuation is the agreed value of the company before new investment is received. Post-money valuation equals the pre-money valuation plus the investment amount. If an investor invests £2M at a £8M pre-money valuation, the post-money valuation is £10M. The investor owns 20% of the post-money company: £2M divided by £10M. The founders own the remaining 80%, less any dilution from the option pool, SAFEs, and convertible notes outstanding at closing.

The Distinction That Matters

Pre-money valuation does not divide ownership. It defines the price at which ownership is divided. Every instrument that converts into equity at closing — SAFEs, convertible notes, and existing option grants — reduces the founders' post-closing ownership before the new investor's percentage is calculated. In a priced round with £500k of SAFE notes converting, the effective pre-money available to founders is reduced by the dilution from those conversions. A founder who models their post-close ownership on the headline pre-money number without accounting for converting instruments will consistently overestimate their economic position after closing.

This is why the fully diluted cap table must model every converting instrument at its conversion mechanics before the term sheet economics are evaluated, not after.

Why It Surfaces in a Raise Process

The pre-money and post-money distinction becomes a live question the moment a term sheet is received. A founder who does not immediately understand the post-close fully diluted ownership table — including the option pool top-up that many investors require as a condition of closing — cannot evaluate whether the economic terms of the round are fair without calculating it. The option pool top-up, if required, is typically taken from the pre-money value, which further dilutes the founders before the new investor's percentage is applied.

The Common Structural Error

The most common error is calculating founder ownership as pre-money valuation minus investment amount divided by post-money valuation. This omits the converting instruments and any option pool top-up required by the term sheet. The resulting ownership estimate overstates the founder's actual post-close position. The correct calculation requires the fully diluted cap table reflecting every outstanding instrument converted at closing.

RELATED TERMS
- How a SAFE Note Converts at a Valuation Cap
- What a Fully Diluted Cap Table Records
- How a Waterfall Analysis Distributes Exit Proceeds
- The Cap Table as a Source of Truth

Tool: Financial Model Blueprint