Example 2
Consider a company with 1,000,000 shares, a convertible loan note for $1,000,000 converting at 75% of the next round price, warrants for 200,000 shares at $10 a share, and a granted ESOP of 200,000 shares at $4 per share. The company receives an offer to invest $8,000,000 at $8 per share.
The post-money valuation is equal to $8 times the number of shares existing after the transaction—in this case, 2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion ($1,000,000 divided by 75% of the next investment round price of $8, or $1,000,000 / (.75 * 8) ), plus 200,000 shares from in-the-money options. The fully converted, fully diluted post-money valuation in this example is $18,933,336.
The pre-money valuation would be $9,133,336—calculated by taking the post-money valuation of $18,933,336 and subtracting the $8,000,000 of new investment, as well as $1,000,000 for the loan conversion and $800,000 from the exercise of the rights under the ESOP. Note that the warrants cannot be exercised because they are not in-the-money (i.e. their price, $10 a share, is still higher than the new investment price of $8 a share).
Read more about this topic: Post-money Valuation