From the monthly archives: January 2011
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Venture capitalists have a short-hand nomenclature for valuation that causes confusion for appraisers and their clients. I’m referring to “pre-money” and “post-money” value. Assume a company has 10 million common shares outstanding and it issues 5 million Series A convertible preferred shares priced at $1.00 each. The pre-money value is equal to the product of the common shares outstanding times the Series A price (10,000,000 X $1.00 = $10,000,000). The post-money value is equal to the pre-money value plus the proceeds from the issuance of Series A ($10,000,000 + $5,000,000 = $15,000,000).
So what’s the problem? It’s that the value of the equity isn’t really $10 million. The VC pays $5 million for Series A shares with privileges the common stock doesn’t have. For example, the Series A preferred is entitled to a liquidation preference over the common stock. When we multiply the Series A price times all the ...
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