Pre-money, post-money, dilution: the practical guide
Three concepts, two formulas and a worked example to know exactly what you are giving up.
When an investor offers to put in an amount “based on a valuation”, the first question to ask is: pre-money or post-money? The gap between the two can amount to several percentage points of equity given up, for the same cheque.
The definitions
| Concept | Definition | Formula |
|---|---|---|
| Pre-money valuation | Value of the company before the funds come in | Negotiated figure |
| Post-money valuation | Value after the capital increase | Pre-money + amount raised |
| Stake sold | Percentage held by the new investors | Amount raised ÷ post-money |
| Price per share | Price paid by the new investors | Pre-money ÷ number of existing shares |
A worked example
Fictitious example: raising 1 M€ at 4 M€ pre-money
- Existing shares: 1,000,000, of which 850,000 are held by the founders (85%).
- Post-money = 4 M€ + 1 M€ = 5 M€.
- Stake sold = 1 M€ ÷ 5 M€ = 20%.
- Price per share = 4,000,000 € ÷ 1,000,000 = 4 €. New shares = 1,000,000 € ÷ 4 € = 250,000.
- After the raise: 1,250,000 shares. The founders hold 850,000 ÷ 1,250,000 = 68%.
If the investor had meant 4 M€ post-money, the stake sold would have been 1 ÷ 4 = 25%, not 20%. Hence the importance of having the term spelled out before any negotiation on price.
Dilution adds up from one round to the next
Each round reduces the stake of all existing shareholders in the same proportion. Selling 20% in round 1 and then 20% in round 2 does not mean losing 40% of your holding, but keeping 80% × 80% = 64% of it.
The fictitious example continued: a 3 M€ round 2 at 12 M€ pre-money
- Stake sold in round 2 = 3 ÷ (12 + 3) = 20%.
- The founders go from 68% to 68% × 80% = 54.4%.
- Their cumulative dilution is 1 − 54.4% ÷ 85% = 36%.
What to negotiate beyond the headline figure
- The BSPCE pool (French employee share warrants): if it is created before the raise, its cost falls on the existing shareholders, not on the new ones.
- Convertible instruments (BSA-AIR, convertible bonds): their conversion adds shares at the time of the next round.
- The rights attached to the shares (liquidation preference, anti-dilution): two offers at the same valuation can be very different once these clauses have been read.
Two formulas are enough to know what you are really giving up; the rest is decided in the clauses. Our dilution simulator reproduces these calculations with your own figures, over two rounds.