Valuation refers to the value of a company. The commonly used term usually refers to valuation prior to an investment (pre-money valuation). This differs significantly from another valuation concept (post-money valuation), which means valuation after an investment and which also determines the share in the company received by the investor.

Pre-money valuation
+ Private equity investment
+ Sweat equity investment
+ Network equity investment
= Post money valuation

Post-money valuation of a target company is NOT therefore universal and shared by all companies; instead it is investor-specific and also determined in a large part by the added value an investor is able to offer the target company. The more an investor has to offer a target company, the higher the company’s post-money valuation can become from the investor’s perspective. The value of sweat equity investment might reduces the amount of money that needs to be invested and functions in a considerably larger role as leverage and as an incentive to invest (a surer feeling of success).

In addition to valuation, the discussions on valuation determination serve as an excellent opportunity to deepen relations between an investor and entrepreneurs. When both parties share a common view of the net worth of a company, many conflict situations will be eliminated.

The purpose of valuation at the time of investment is complex, too. Firstly and most importantly, it determines the investor’s share in the company but at the same time it indirectly decides:

  • price per share of shares
  • purpose of investment
  • adequacy of financing (time span)
  • commitment of founder shareholders to company
  • shareholder risks
  • expected return on investment

You should not start to undertake valuation yourself. Use a reliable software for this. Free Angel Tool (#AngelTool)software enables you to calculate the valuation of your company in 17 different ways in just a few minutes. Use the rule of thumb below:

  1. Excellent idea – PowerPoint presentation EUR 100,000
  2. Product works – prototype ready EUR 250,000
  3. Market functions – customers purchased EUR 500,000
  4. Business established – some purchases EUR 1,200,000 – Business running – steady purchases EUR 1,500,000

If a company’s pre-money valuation exceeds EUR 1.5 million, it has an excellent basis and strong track record of successful operations.