**Understanding Investor Valuation Terms for Your Company**
When seeking investment, it is crucial to grasp how investors evaluate your company and comprehend terms like ‘pre-‘ or ‘post-‘ money, and ‘diluted’ and ‘undiluted’. These terms provide insight into what an investor anticipates in terms of a future shareholding in your company and the valuation they are willing to pay. Failing to understand these terms could result in unintentionally giving away more of your company or undervaluing it.
**Pre- and Post-Money Valuations**
In seed fundraising, investors provide cash to a company in exchange for shares. A ‘pre-money’ valuation of the company is established before the investment, while a ‘post-money’ valuation is determined after the investment. For instance, a pre-money valuation of £1m is equivalent to a post-money valuation of £1.5m if the investment is £500k.
For a £500k investment at a pre-money valuation of £1m, the company’s value increases to £1.5m, and the investor holds 33.3%. On the other hand, a £500k investment at a post-money valuation of £1m leaves the company’s value unchanged at £1m, with the investor holding 50%.
**Undiluted and Diluted Share Capital**
Undiluted share capital comprises all issued shares of a company, while diluted share capital includes potential shares through options, warrants, and convertible loans. This illustrates a person’s percentage interest in a company if all potential shares materialize and result in newly issued shares.
In a scenario where an investor wishes to acquire a 10% stake in a company on an undiluted basis with a 25% option pool, the post-investment ownership may look like the following:
**Undiluted**
– Founder: Pre-completion 100%, Post-completion 90%
– Investor: Post-completion 10%
– Total: 100%
**Fully-Diluted**
– Founder: Pre-completion 90%, Post-completion 81.8%
– Investor: Post-completion 9.1%
– Option pool: Post-completion 9.1%
– Total: 100%
By clarifying the basis of the investment and understanding valuation terminology, you can significantly impact the actual investment amount.
**For more information on valuing your company for investment, contact Sally Johnston at Russell Cooke at +44 (0)20 8394 6442 or sally.johnston@russell-cooke.co.uk.**
Sally Johnston from Russell Cooke specializes in advising startup and scaling companies on corporate and commercial law, focusing on fundraising, growth, share schemes, incentives, brand protection, commercial contracts, and M&A.
