The distinction between pre-money and post-money valuation is one of the most frequently confused concepts in startup fundraising — and getting it wrong can cost founders significant equity.
The definitions
Pre-money valuation: The company's agreed value before the investment. The price is set by negotiation — investors and founders agree on what the company is worth at this moment, before any new capital.
Post-money valuation: Pre-money + Investment. This is the company's value after the round closes and the new capital is on the balance sheet.
Investor ownership = Investment / Post-money valuation
Why it matters
Imagine an investor says: "I'll invest $1M at a $5M valuation."
If $5M is pre-money: Post-money = $5M + $1M = $6M Investor ownership = $1M / $6M = 16.7%
If $5M is post-money: Pre-money = $5M − $1M = $4M Investor ownership = $1M / $5M = 20%
Same sentence, same numbers — but a 3.3 percentage point difference in investor ownership. At a later exit, this gap compounds significantly.
What term sheets say
Professional term sheets always specify whether a valuation is pre-money or post-money. The standard format: "The Company will issue and sell shares at a price per share equal to $X, representing a pre-money valuation of $Y."
Red flags: - Valuation stated without pre/post specification - "Valuation of $5M" without context - Verbal agreements that differ from written term sheet language
If in doubt: ask explicitly. "Is that $5M pre-money or post-money?" No serious investor will be offended by the question.
The option pool complication
Many term sheets require creating an option pool before closing, which adds shares to the cap table pre-investment and further dilutes founders.
Example: $5M pre-money with a 15% option pool expansion.
If you have 10M shares and investors require a 15% post-round option pool: New options = (10M + new options + investor shares) × 15%
This is solved iteratively. The key point: option pool expansion always comes from the pre-money side — it dilutes existing shareholders, not investors.
Model your round at the Equity Dilution Calculator.