I have seen two formulas for this. Both are simple but they seem quite different. Are they the same thing? Post = Pre + Investment Post = PV(Exit value)
sort of…I take the exit value to mean the very last number they give you that they are projecting this thing to be worth. Then you have to work backwards to get the PV. Drawing a timeline on these works wonders, but knowing the terminology is key.
Its odd because the formulas suggest that Pre + Investment = PV(Exit Value)
both formulas are correct, but they involve different circumstances. the first formula is for when the VC actually puts $ into the company. it is valuing what the founders/original backers own + the VC investment = post money valuation. the second formula is sort of backing into the VC’s projection of how much money they will make on the deal. it’s doing a PV of their % ownership * what the company will exit at (selling or IPO). typically the first formula is used a lot, second not so much. Usually the VC is calculating their IRR, not using the 2nd formula.
I think of it this way: The pre is just the NPV of the business without additional investment The post is the NPV of the business with an additional investment. To get this NPV, you have to assume an exit value AND you can’t realize the exit value without the investment, the post = PV(Exit Value) Since the NPV of the investment IS the investment itself, the post also = pre + investment You could get into a discussion about whether or not the investors are good negotiators, which would make the NPV of the investment not equal the investment, but that’s not what CFAI is testing