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Intermediate

What is pre-money valuation

Also known as: pre-money, pre money valuation

Definition

Pre-money valuation is the agreed value of a company just before new investment comes in. It sets the price per share and how many shares the investor receives.

Why it matters

The pre-money is the price of the round: the higher it is, the less of the company you give for the same money.

Common mistakes

Confusing pre-money with post-money. ₪4,000,000 pre-money and ₪5,000,000 post-money describe the same round.

Related terms

Worked exampleIllustration

Pricing a ₪1,000,000 seed round

Illustrative numbers: a fictional clinic booking app raises ₪1,000,000 at a ₪4,000,000 pre-money valuation, with 8,000 fully diluted shares before the money.

  1. Post-money valuation is the pre-money plus the investment.

    ₪4,000,000 + ₪1,000,000 = ₪5,000,000

  2. The investor's share after the round.

    1,000,000 ÷ 5,000,000 = 20%

  3. Price per share is the pre-money divided by the fully diluted shares before the round, pool included.

    ₪4,000,000 ÷ 8,000 = ₪500

  4. The shares the investor receives.

    ₪1,000,000 ÷ ₪500 = 2,000

  5. Had the pre-money been ₪3,000,000, the same cheque would have bought more of the company.

    1,000,000 ÷ 4,000,000 = 25%

The higher the pre-money, the less you give for the same money.

Illustration

The price is set before the money

Before the round: ₪4,000,000, Today's shareholders 100%. After the round: ₪5,000,000, Today's shareholders 80%, New investor 20%.⁨Before the round⁩⁨After the round⁩100%80%20%₪4,000,000₪5,000,000
  • Today's shareholders80%
  • New investor20%

At a pre-money of ₪4,000,000, an investment of ₪1,000,000 buys 20% of the company. ₪4,000,000 ÷ 8,000 shares = ₪500 a share, so the investor gets 2,000 new shares. Lower the pre-money and the same money buys more.

Each pie's area is the company's value. The dashed gold ring marks the pre-money valuation, the price agreed before the money arrives.

Agreeing the pre-money

The pre-money sets how much of the company the same money buys.

Situation

An investor will put in ₪1,000,000 and asks you to agree the pre-money valuation before the term sheet is written.

Choose an option

Definition

Pre-money valuation is the value the company and the investor agree for the company just before the new money arrives. Divided by the fully diluted shares before the round, it gives the price per share, and the investment divided by that price gives the investor's new shares. If an option pool is created inside the pre-money, its shares are part of that count, which lowers the price the existing holders receive.

Why it matters

It is negotiated, not calculated, from the team, the market and the traction so far. The headline number can mislead, because an option pool created inside it and the other terms of the sheet change what the founders actually receive.

Directly related: Equity, Dilution, Term Sheet.

Formula

Pre-money Valuation = Post-money Valuation - Investment Amount

Improvement tips

  • Negotiate from evidence: traction, the team and what similar rounds were priced at.
  • Ask whether the option pool is inside the pre-money, and if it is, work out the founders' real price per share.
  • Remember that a very high valuation raises the bar for the next round.

Common mistakes

  • Ignoring an option pool created inside the pre-money, which lowers the founders' real price.
  • Looking at the valuation alone and not at the other terms of the deal.
Pre-money vs Post-money Valuation

Related terms

StartupsBeginner

Equity

Equity is ownership of a company, measured in shares and percent. On a balance sheet the same word means book equity: what the business owns minus what it owes.

StartupsIntermediate

Dilution

Dilution is the fall in existing shareholders' percentage of a company when it issues new shares. The percentage drops, while the stake's value can rise.

StartupsAdvanced

Term Sheet

A term sheet is a short, mostly non-binding document with the key terms of an investment, such as amount, valuation, control and liquidation preference.

StartupsIntermediate

Post-money Valuation

Post-money valuation is a company's value right after a funding round: the pre-money value plus the new investment. It sets each investor's percentage.

StartupsIntermediate

Option pool

An option pool is a block of shares reserved for future employees' options. If it is created before the investor's money, existing shareholders pay for it.

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Quick check

A company raises ₪1,000,000 at a ₪4,000,000 pre-money valuation. What percentage will the investor own after the round?

Choose an answer

Frequently asked questions

Do I need a pre-money valuation before I launch?
No. Many early companies raise with SAFEs, which postpone the valuation, though a SAFE's cap acts as a ceiling. You set a pre-money when you run a priced round.
When does the pre-money become part of the negotiation?
When a lead investor offers a priced round. It is the value agreed for the company just before their money comes in.
Can a formula set my pre-money?
No. At an early stage it is negotiated from the team, the market, the product, the traction so far and what similar companies raised at.
How does the pre-money change what I give up?
A higher pre-money means fewer shares for the same money. ₪1,000,000 at a ₪4,000,000 pre-money buys 20%, and at ₪3,000,000 it buys 25%.
Why does the pre-money matter for existing shareholders?
It sets the dilution that everyone who holds shares today takes in the round.
How do I get the pre-money from a post-money figure?
Subtract the investment: a ₪5,000,000 post-money minus ₪1,000,000 invested is a ₪4,000,000 pre-money.
What goes wrong with an unrealistically high pre-money?
It raises the bar for the next round. If the company does not grow into it, the next round may be priced lower, a down round, which hurts morale and dilutes more.
How does the option pool change my price per share?
If the pool is created inside the pre-money, its shares are part of the count, so the price per share falls. With a ₪4,000,000 pre-money and a pool of 1,000 shares, the founders' 7,000 shares are priced at ₪3,500,000, not ₪4,000,000.
What is pre-money valuation in plain words?
The price tag on the company just before the investor's money goes in.
Is calculating the pre-money complicated?
The arithmetic is one subtraction. The hard part is the negotiation.
Do I need a certified appraiser for my pre-money?
Not for the price of the round, which the founders and the investor negotiate. Whether a valuation is needed for tax, for example for employee grants, is a question for your accountant. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Does setting a pre-money cost cash?
No. It is a negotiated number, and the cost is the percentage it gives away.

Sources: Carta, "Pre-Money Valuations vs. Post-Money Valuations" (carta.com/learn), checked September 2026

Last reviewed: 2026-09-24

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