28 Questions
What does the pre-money valuation represent?
The value of the company before the investment
How is the post-money valuation calculated?
By adding the pre-money valuation to the contemplated aggregate investment amount
In the context of venture capital, what does 'dilution' refer to?
The decrease in the percentage ownership of existing shareholders due to new shares being issued
How does a $5 million investment at a pre-money valuation of $20 million compare to a $5 million investment at a post-money valuation of $20 million?
The former buys 20% and the latter buys 25% of the company
What is the significance of agreeing on a valuation with a VC in terms of ownership?
It determines how much dilution you will take in the financing
Why should entrepreneurs be cautious when interpreting VC offers related to valuation?
VCs often refer to post-money valuations, while entrepreneurs may interpret them as pre-money valuations
How can entrepreneurs address ambiguity about price in a negotiation with a VC?
By assuming a specific pre-money valuation and forcing the VC to clarify
What does the agreed-upon valuation determine in the context of the negotiation?
The price per share an investor pays
How is the price per share of stock often expressed in modern term sheets?
In vague terms, as long as the valuation and option pool are agreed to
What does the fully diluted post-money valuation represent?
The company's valuation after conversion of all outstanding preferred stock and exercise of stock options
What is the purpose of reserving shares of Common Stock before the closing during a financing?
To prevent dilution of existing shareholders' ownership
How does defining the amount of financing back into the price differ from traditional representation?
It represents a different way to express price by defining the financing amount
The term sheet language usually spells this out in ______.
detail
By addressing the ambiguity up front, you demonstrate that you have knowledge about the basic ______.
terms
The agreed-upon valuation will determine the price per share an investor ______.
pays
The Original Purchase Price represents a fully diluted pre-money valuation of $______ ______ and a fully diluted post-money valuation of $______ million.
million
A somewhat different way that price can be represented is by defining the amount of the financing, which ______ into the price.
backs
Pre-Money Valuation: $______________ The price per share of stock, also known as the purchase price, will often be expressed in ______ terms.
vague
As long as the valuation and option pool are agreed to, then the dilution is determined and the price per share is largely irrelevant as they are a ______ number.
calculated
The best entrepreneurs we’ve dealt with are presumptive and say something like “I assume you mean $20 million ______.”
pre-money
The way price is represented in a term sheet follows: Price: $______ per share (the Original Purchase Price). The Original Purchase Price represents a fully diluted pre-money valuation of $______ million and a fully diluted post-money valuation of $______ ______.
million
Modern term sheets will address valuation very simply and say: Pre-Money Valuation: $______________ The price per share of stock, also known as the purchase price, will often be expressed in ______ terms.
vague
The pre-money valuation is what the investor is valuing the company at ______, prior to the investment.
today
The post-money valuation is simply the pre-money valuation plus the contemplated aggregate investment amount. In other words, if you raise $2 million at a $6 million pre-money valuation, your post-money valuation is $8 million. Therefore, the post-money valuation is ______.
calculated as $6,000,000 + $2,000,000 = $8,000,000
Since the investor invested $2 million and the company is now worth $8 million post-financing, the investor just bought ______ of your company.
25%
When a VC says, “I’ll invest $5 million at a valuation of $20 million,” the VC usually means the post-money valuation, meaning the pre-money the VC is offering you is ______.
$15 million
At the same time, an entrepreneur might hear a $5 million investment at a pre-money valuation of $20 million, which would buy only ______ of the $25 million post-money company.
20%
The valuation that you and your VC agree upon will determine how much of your company you are selling and, consequently, how much dilution you will take in the financing. The valuation also will determine the price per share at which you sell your stock. There are two different ways to discuss valuation: pre-money and post- money. The pre-money valuation is what the investor is valuing the company at today, prior to the investment. The post-money valuation is simply the pre-money valuation plus the contemplated aggregate investment amount. In other words, if you raise $2 million at a $6 million pre-money valuation, your post-money valuation is $8 million. Therefore, it is ______.
important for entrepreneurs to carefully understand the implications of the valuation in terms of ownership and financing
Learn about the concepts of pre-money and post-money valuation in the context of venture capital financing. Understand how these valuations determine the ownership stake and dilution for founders, as well as the price per share at which stock is sold.
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