Startup valuation: pre-money, post-money and negotiation

What do pre-money and post-money valuation mean?

The pre-money valuation is the value that founders and investors agree to give the company just before the round. It sets the price of each new share issued to the investor.

The post-money valuation is the value just after the round. It equals the pre-money plus the amount invested, since that money goes into the company’s bank account.

Which methods are used to value a very young startup?

Classic financial methods, based on profits or future cash flows, work poorly for a company with no track record. At the seed stage, people therefore combine several qualitative and comparative approaches.

• Comparables: the valuations set in recent rounds by similar startups in terms of sector, stage and geography, to be cross-checked carefully because public information is often incomplete.
• The venture capital method: start from a plausible exit value, apply the return multiple the investor expects, then work back to the value that is acceptable today.
• Scoring grids (such as the so-called scorecard or Berkus methods): they assign value to criteria such as the team, the product, the market, partnerships or first sales.
• The needs-based approach: start from the amount required to reach the next milestones and the share of the equity the founders are willing to give up, and the valuation follows from that.

No method gives you the truth. They help you build an argument and check that a proposal stays consistent with the market and with your needs.

In a French company, the valuation translates into the issue price of the new shares. Existing shareholders have a pre-emptive subscription right on cash capital increases (Commercial Code, article L225-132), which can be waived, for example to let a new investor subscribe.

What pushes a valuation up or down?

At this stage, investors are mainly buying a risk, and anything that verifiably reduces that risk supports the valuation.

• ✓A complete, complementary founding team, with a clear division of roles and a full-time commitment.
• ✓Market evidence: active users, first revenue, letters of intent, steady growth in usage.
• ✓A product that works, even partially, and documented customer feedback.
• ✓A large enough market and a credible vision of how to win it.
• ✓Assets that are protected or hard to copy: technology, data, know-how, brand.
• ✓A clean legal position: a sensible split of the equity, a shareholders’ agreement, clear ownership of the code and the brand.
• ✓Competition between several interested investors, which gives you room to negotiate.

Conversely, an incomplete team, dependence on a single customer, an urgent need for cash or a cap table that is already very fragmented weigh on the value or on the terms offered.

How do you negotiate your valuation without selling cheap or blocking the next round?

A valuation that is too low heavily dilutes the founders from the very first round. A valuation that is too high may feel flattering but can make the next round difficult if the company has not progressed enough to justify it.

1. 1Start from your real need: how many months of work and which milestones must be funded before the next round?
2. 2Set the maximum share of the equity the founders are willing to give up in this round, taking into account later rounds and a pool for employees.
3. 3Gather a few recent, relevant comparables and cite their sources.
4. 4Present the evidence that reduces risk, with verifiable metrics rather than ambitious projections.
5. 5Meet several investors in parallel so you do not depend on a single offer.
6. 6Negotiate the full set of terms and not just the number, because some clauses matter as much as the valuation.

A high valuation combined with unfavourable clauses, such as a heavy liquidation preference, can be worth less to the founders than a more modest valuation on simple terms. Our guide to the term sheet covers these clauses in detail.

Can you postpone the valuation question?

Yes. Some instruments let investors put money in without setting the company’s value straight away. The valuation is then determined at a later round, often with a discount or a cap in favour of the early investors.

In France, the best-known of these is the BSA AIR, a French convertible instrument covered in our BSA AIR guide. It simplifies a small round but does not remove the negotiation, which simply moves to the cap and the discount.

Which mistakes should you avoid?

• Confusing pre-money and post-money when working out the stake you give up.
• Picking the offer with the highest valuation without reading the other terms of the term sheet.
• Leaving the BSPCE pool (French employee stock options) out of the calculation, when investors often ask for it to be created before they come in.
• Relying on valuations you read about in the press, often for more advanced companies or in different contexts.
• Presenting unrealistic financial projections to justify a figure, which erodes trust.
• Negotiating legal documents alone without a review by a lawyer used to funding rounds.