"Pre-money valuation" is a term widely used in the private equity and venture capital industries.
Startups and venture capital-backed companies usually receive multiple rounds of financing rather than a big lump sum.
There are many different methods for valuing a business, but basic formulae include:[citation needed] Shareholders of Widgets, Inc. own 100 shares, which is 100% of equity.
A new investor agrees to make a $20 million investment for 30 newly issued shares.
Series B Cap table Note that for every financing round, this dilutes the ownership of the entrepreneur and any previous investors.
Furthermore, in a survey of ten attorneys at different Silicon Valley law firms by the WSJ, eight said that share price should be used to categorize the round.
[3] However, the other two lawyers surveyed by the WSJ argued that both share price and valuation should be used to categorize the round because it depends on perspective.
Moreover, according to the WSJ, some companies and investors argue that only valuation should be used to categorize the round, not share price.
Successful, growing companies usually raise equity in a series of up rounds from institutional investors.
For example, the company may go public via an IPO, direct listing, or merger with a SPAC.
As a result, companies and investors may use financial engineering to structure a deal as an up round, even if the share price only increases by a penny.