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Our Founder Portal is a contains a series of bite-sized pieces of advice, some practical templates covering some of the most popular Founder requests for information, founder stories, and access to our blog. All these resources combine to help you on your journey to growth. To find out more, sign up for a free introductory consultation on our bookings page or contact us today.
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Vital Advice
Why do pre-money and post-money valuations actually matter?
Let’s look at a worked example using the calculation for a new investor who is investing in your business.
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If an investor is investing, say, £2m for a 20% stake in the business, that 20% relates to the post-money valuation. In other words:
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· 20% of £10m = £2m. The £10m is the post-money valuation, i.e., the value of the company after you take receipt of the new investment.
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The post-money valuation is arrived at by taking the pre-money valuation and adding the new investment, i.e., the pre-money valuation must be £8m, because, when you add £2m it equals the £10m post-money valuation. Therefore, your Cap Table must always calculate to reflect the post-money position - the new investment buys 20% of the resulting share capital post-raise, so the new investors wind up owning 20% of your business.
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Therefore, when you present a deck seeking a £2m investment, it might say "£2m for 20% of the business", if it says anything at all. Remember, you don't need to put your table stakes down - just the amount you are raising – so must decks have an “The Ask” slide saying that you are looking for an investment of £2m, explaining very simply what that £2m will be spent on. The 20% is your internal guide for what you expect to give away, but you should always negotiate hard to protect your founder' equity stake in the business.
What is a Cap Table & how do I prepare one?
A Cap Table (short for Capitalisation Table) is the place you keep track of how equity investment into your business will affect existing and new shareholders. It is essential to build and model your cap table prior to a raise so that you can gain comfort that you are doing a good deal: exchanging a cash injection for an equity stake in your business at a valuation that makes sense.
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A good Cap Table is maintained through each funding round so that prospective investors can understand your capital structure and how it has evolved as a result of previous funding rounds. Indeed, investors are often interested in where their investment ranks in relation to other investors.
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Startups commonly create an “Options Pool” to incentivise and reward employees and advisors with small equity stakes in return for their participation. The Cap Table is where the impact of the options pool is modelled and finalised.
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Finally, your Cap Table is a key component of key raise documents such as the ‘Investment Agreement’ which require to lay out pre- and post-raise shareholdings in your business. In the UK, you’re the Cap Table is also the source document with which to populate use Register of Members.
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To get started, use our handy template.
