When we value a company, we value its equity (the Market Value of Equity) to determine the price paid for a transaction (acquisition, financing or other) where the investor receives ownership, which is an equity stake. The valuation can take place also for information purposes for debt financing, but it is mostly relevant for equity transactions.
When we talk about startup valuation, we use different terms than we would use in standard valuation, where we refer to Enterprise or Entity Value and Market Value of Equity to indicate the value of a company with or without its net debt (plus other adjustments).
With startup valuations for financing purposes, these terms are rarely used. Also, a startup is unlikely to have net debt or non-operating assets, and therefore the Enterprise Value usually equals its Market Value of Equity.
For startups, you will instead often see the terms post-money valuation and pre-money valuation.
Pre-money valuation refers to the value of the company before the investment. Post-money valuation refers to the value of the company after the equity financing has taken place.
The equity stake is calculated on the post-money valuation, which represents the Market Value of Equity in the traditional sense. The scope of using these terms, particularly the use of the ‘pre-money valuation’ is mainly to calculate the correct portion of shares before and after a transaction with its fully diluted value, which we will see later.
In many cases, an early-stage startup valuation is not calculated, but rather it is assumed based on the negotiated terms of the transaction.
The assumed value of your startup is calculated by dividing the investment needed by the amount of shares (or stake) given away to the investor, to arrive at the post-money valuation. This reveals the underlying or assumed valuation based on the investment that is at the basis of the negotiations:
Subsequently, we can also calculate:
Pre-money valuation = Post-money valuation – Investment