People often ask about the meaning of two terms they hear bandied about: pre-money valuation and post-money valuation. For both investors and business owners, the distinction proves critical.

A pre-money valuation represents the value of a company or asset before new money is invested whereas a post-money valuation represents the value after the receipt of new money. For example, if an entrepreneur and prospective investor agree that the value of a new business is $1 million before receiving the investor’s $250,000 in added capital, then the $1 million stands as a pre-money valuation. If, on the other hand, the entrepreneur and investor were to agree that after receipt of the investor’s $250,000, the value would be $1 million, then the $1 million represents a post-money valuation. Please reference the table below.

While the 5% difference in equity ownership may not seem overly significant at this early stage, it may well prove both critical and highly valuable during subsequent financing rounds or at the time of a company sale or public offering.