Why pre-money valuation matters to a first-time founder
The pre-money valuation decides how much of your company you give away for a given amount of money. Raise £200,000 at £800,000 pre-money and you sell 20%; at £1.8 million pre-money you sell 10%. Founders who focus only on the size of the cheque, or confuse pre-money with post-money, routinely hand over more equity than they intended and start the next round with less room to manoeuvre.
Examples of pre-money valuation
You agree the company is worth £900,000 before the round. The investor adds £100,000. On that deal the company is worth £1,000,000 once the money is in, and the investor owns 10%. The £900,000 is the pre-money valuation. It is a price you negotiated. It is not a number you can look up.
Common misunderstanding
People quote the value after the new money by mistake, or they talk about the valuation as if it were cash the company already holds. The pre-money valuation is the price before the cheque. At this stage it is mostly a way to settle the percentage you are selling.
When to use it
Concentrate on the pre-money valuation when you are exchanging ownership for capital. Work out the percentage you will hold afterwards before you celebrate the headline number. A high price that the company then fails to grow into can make the next round harder to raise.