Pre money valuation and post money valuation are the two numbers a round produces, and the whole of pre money vs post money is one subtraction: the post-money is what the company is worth with the new money in, the pre-money is what it was worth before, and the difference is the money raised. Every confusion at a term sheet comes from applying a percentage to the wrong one. This page works the pre money post money calculator on the hub's example, $500,000 raised for 20%, states the two formulas and the two mistakes, and shows what the numbers become when the round is priced on the pre-money instead of the percentage. The free startup valuation tool on this site does the arithmetic from your own term sheet, with no account.
The post money valuation calculator: the raise divided by the equity given
Post-money valuation equals the amount raised divided by the percentage of the company the investor receives. $500,000 for 20% is $500,000 divided by 0.20, $2,500,000. That is the company's implied value with the new cash on its balance sheet, and it is the number the investor's percentage is a share of: 20% of $2,500,000 is the $500,000 they paid. A post money valuation calculator does that division and nothing else; the judgement is in the two inputs, and the tool on this site shows the result for whatever pair the term sheet carries.
The pre money valuation calculator: post-money less the raise
Pre-money valuation equals the post-money less the amount raised: $2,500,000 less $500,000 is $2,000,000, the value the investor placed on the company before their money went in. The founders and earlier holders own 100% less the equity given, 80%, and 80% of the $2,500,000 post-money is $2,000,000, the pre-money again, which is the check that the arithmetic is right. A pre money valuation calculator that asks for the post-money and the raise is doing the subtraction; one that asks for the pre-money and the raise is doing the addition, and both are on this site's startup valuation tool.
Pre vs post money valuation: the two mistakes
The first mistake is applying the investor's percentage to the pre-money: 20% of $2,000,000 is $400,000, and a founder who thinks the investor is paying $400,000 for 20% has priced the round $100,000 low. The second is the reverse: a term sheet that says a $2,000,000 valuation without saying pre or post is two different deals, a $2,500,000 post-money with 20% given, or a $2,000,000 post-money with 25% given and a $1,500,000 pre-money. Pre-money vs post-money valuation is therefore the first question to ask of any number an investor names, and the tool on this site shows both readings side by side so the question is answered before the signature.
Pricing the round on the pre-money, and what converts into it
Rounds are often priced the other way: the investor names a pre-money and an amount, and the percentage follows: a $2,000,000 pre-money and $500,000 raised is a $2,500,000 post-money and 20% given, the same round from the other end. Notes and SAFEs raised earlier convert at the round at their discount or cap and take equity from the same post-money, so the founders' share after everything converts is the number to read; the SEC's Regulation D pages, linked below, describe the exemption most such rounds are sold under, and the Small Business Administration's guide to funding a business is the plain-language reference. The free startup valuation tool on this site takes the converting instruments as inputs and shows the founders' number after them.
Questions people ask about pre money valuation
What is the difference between pre money and post money valuation?
The money raised. Post-money is the raise divided by the equity given, pre-money is the post-money less the raise. $500,000 for 20% is a $2,500,000 post-money and a $2,000,000 pre-money.
What percentage do the founders keep?
100% less the equity given to the new investor, less whatever earlier notes or SAFEs convert into. On the hub's example, 80% before any conversions, worth $2,000,000 of the $2,500,000 post-money.
An investor said a $2,000,000 valuation; is that pre or post?
Ask. Pre-money with $500,000 raised is a $2,500,000 post-money and 20% given; post-money with $500,000 raised is 25% given and a $1,500,000 pre-money. The tool shows both readings.