A private equity investor is considering making an investment in a venture capital firm. The investor values the firm at $1.5 million following a $300,000 capital investment by the investor. The venture capital firm’s pre-money (PRE) valuation and the investor’s proportional ownership, respectively, are:
| PRE valuation | Ownership proportion |
The pre-money valuation (PRE) is simply the venture capital firm’s post-money valuation (POST) less the capital investment (INV):
PRE = POST − INV = $1.5 million − $300,000 = $1.2 million.
The ownership proportion is the investor’s fractional ownership of the firm value after the capital infusion:
Ownership proportion = INV/POST = $300,000 / $1.5 million = 0.20 or 20%. |