{"id":26237,"date":"2025-01-13T19:00:13","date_gmt":"2025-01-13T19:00:13","guid":{"rendered":"https:\/\/peraltafinancing.com\/angel-investor\/the-critical-difference-between-pre-and-post-money-valuations-pitching-angels\/"},"modified":"2025-01-13T19:00:13","modified_gmt":"2025-01-13T19:00:13","slug":"the-critical-difference-between-pre-and-post-money-valuations-pitching-angels","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=26237","title":{"rendered":"The Critical Difference Between Pre- and Post-Money Valuations \u2013 Pitching Angels"},"content":{"rendered":"
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Here\u2019s why no serious investor will consider your pre-money SAFE<\/h2>\n
You\u2019ve pitched to my group of 100 angel investors.\u00a0We\u2019re impressed with your product, your team, your presentation. You get to the last slide and ask us to invest $1M in your SAFE with a $10M valuation cap.<\/p>\n
Hands go up around the room. First question: \u201cIs that $10M pre or post?\u201d<\/p>\n
You fumble. You don\u2019t know. You promise to check with your lawyer or your accountant or your CFO and get back to us.<\/p>\n
Nobody will tell you this, but sorry, you just failed. We\u2019ll ask more questions in the time allotted to Q&A, listen politely to your answers, and later inform you that sorry, there wasn\u2019t enough interest from our group but we wish you great success.<\/p>\n
What just happened?<\/p>\n
There are 2 kinds of SAFEs: the pre-money and post-money SAFE. (There\u2019s also the discount-only SAFE, but that\u2019s such a non-starter it isn\u2019t even in the conversation.)\u00a0The only thing worse than using the wrong one (pre-money SAFE) instead of the right one (post-money SAFE) is not knowing the difference.<\/p>\n
There\u2019s only a minor variation the wording between the two different types of SAFE, but a world of difference in what the investor is getting.\u00a0The post-money SAFE is a good instrument for early-stage investment; the pre-money SAFE is avoided by serious investors.<\/p>\n
The Difference Between Pre-Money and Post-Money Valuations<\/h3>\n
The calculation to convert between pre and post-money valuations seems trivially simple:<\/p>\n
If you raise $1M on a $10M pre-money valuation, the post-money valuation is $11M.<\/p>\n
Simple? Sure seems that way. Even dumb investors ought to be able to do the arithmetic. We shouldn\u2019t care whether the investment is framed as pre or post-money. But\u2026this misses the most critical point.<\/p>\n
The post-money valuation is the pre-money valuation plus\u00a0ALL\u00a0<\/strong>investment prior to the conversion of the SAFE to preferred shares.<\/p>\n
If you only have 1 round of SAFEs prior to Series A, then the calculation is indeed simple: $10M pre + $1M SAFE = $11M post when I receive my shares.<\/p>\n
But let\u2019s say you previously raised $1M in a friends and family round.\u00a0Now that post-money valuation isn\u2019t $11M but $12M. Oh, don\u2019t forget the strategic investor that put in another $1M on a convertible note.\u00a0Now the post-money valuation is $13M. Hmm.<\/p>\n
But I could live with that. You can tell me the total amount you\u2019ve raised to date.\u00a0Here\u2019s the real problem: the post-money valuation also includes all the money you\u2019ll raise in\u00a0future\u00a0<\/em>rounds prior to issuing preferred shares.\u00a0And the future is unknown even if you claim to have a inviolate, foolproof plan.\u00a0Meaning the price I\u2019m paying to invest in your startup is\u00a0unknown.<\/p>\n
If your next round is a priced round (issuing preferred shares at a set price per share), then I get my shares at the expected $13M valuation. Great.<\/p>\n
However, if you raise a seed round of $4M on a SAFE or convertible note, the price I pay for my shares goes up to $17M. Another $3M bridge round? The meter is still running, now to $20M.<\/p>\n
The shares I thought I was buying at a $10M valuation end up actually costing me $20M. Would I have invested in the company at a $20M valuation? Probably not.<\/p>\n
Why Does the Pre-Money SAFE Even Exist?<\/h3>\n
The original SAFE created by Y-Combinator used a pre-money valuation cap.\u00a0That was a hold-over from the convertible notes everyone was using at the time.<\/p>\n
The convertible note uses a pre-money valuation because the document was repurposed from its original use for large loans by private equity to public companies. In that context, a pre-money valuation makes sense.<\/p>\n
The pre-money valuation was fine for an accelerator, but investors balked at using it. So in 2018, YC updated the original SAFE with v1.1, switching to a post-money valuation cap that investors found much more attractive.<\/p>\n