This is an important concept in early stage investing understanding and being able to calculate the pre and post-money valuations is critical when discussing future investments. Let's look at the two terms. Firstly, pre-money valuation. A pre-money valuation is the value of a startup company prior to the round of capital being raised. It values the company before any further investment is made. Since most startups are not profitable in the early stages, the valuation is usually based on a revenue multiple. This would mean taking the company's revenues last year or next year's projected revenues and multiplying them by an industry or sector average, such as two times or four times to derive the valuation.

The other term is a post money valuation. This is relatively simple. It is the value of the startup company after the funding round is complete. Thus, it is important to understand when discussing a valuation if it is pre or post money. It is a simple concept, but can make a huge difference to a valuation negotiation if discussing different terms.

Here is an example. A startup company has a pre-money valuation of $7.5 million and is seeking to raise a series a round of $10 million. We can therefore calculate that the post money valuation is 17.5 million. It is the pre-money valuation, 7.5 million, plus the fundraising target 10 million. That gets us to the post-money valuation of 17.5. However, there may be some reasons for the numbers to be slightly different to this. If the company already had seed investors with various provisions called discounts and valuation caps, then the series A post money will be slightly different. It'll be a little bit higher.