Venture Capital puzzles, solved step by step

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  1. 077A founder tells you: we raised Rs 50 crore at Rs 200 crore. What share of the company did the investors buy if Rs 200 crore is the pre-money valuation, and what if it is the post-money?Valuation riddlesWarm upSeed and early-stage VCSeries A to C VC

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    Answer in five seconds: what share did the investors buy?

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    20% if Rs 200 crore is the pre-money, 25% if it is the post-money. Pre-money is the value before the cheque, so post-money is 200 plus 50, Rs 250 crore, and 50 over 250 is 20%. If Rs 200 crore already includes the cheque, investors own 50 over 200, which is 25%, and the pre-money was only Rs 150 crore. One unstated word moves five points of the company.

    What do pre-money and post-money actually mean?

    Two friends own a food stall worth Rs 2,00,000. A third friend puts in Rs 50,000 for a new oven. The stall is now worth Rs 2,50,000 and the new friend owns a fifth of it, because the Rs 50,000 is inside the new total. Pre-money is the value before the new money arrives, post-money is pre-money plus the new money, and the investor's share is always the cheque divided by post-money. The only question is which of the two numbers the founder quoted.

    One sentence, two readings: the same cheque buys 20% or 25%Rs 200 crore is pre-moneyInvestors 20%Existing holders 80%Post-money Rs 250 crore50 / 250 = 20%Rs 200 crore is post-moneyInvestors 25%Existing holders 75%Pre-money Rs 150 crore50 / 200 = 25%
    The same Rs 50 crore cheque buys 20% when Rs 200 crore is the pre-money, because post-money is then Rs 250 crore, and 25% when Rs 200 crore is the post-money, because the company was valued at only Rs 150 crore before the cheque.
    The relationship
    s=IPre+I=IPost50250=20%50200=25%s = \frac{I}{\text{Pre} + I} = \frac{I}{\text{Post}} \qquad \frac{50}{250} = 20\% \qquad \frac{50}{200} = 25\%
    sshare of the company the new investors own
    Ithe new money, Rs 50 crore
    Pre, Postvaluation before and after the new money
    What it says in wordsThe investor's share is the cheque over the value of the company with the cheque inside it.

    Why does the post-money reading cost the founder more?

    If Rs 200 crore is post-money, the pre-money is only Rs 150 crore: the founder sold Rs 50 crore of shares against a company valued Rs 50 crore lower. 25% against 20% is a quarter more of the company for the same cheque, and that extra slice is diluted alongside everything else in every later round. Check both readings the same way: 20% of 250 is 50, and 25% of 200 is 50. Both pass, which is exactly why the sentence alone cannot settle it.

    Headlines tend to quote whichever number sounds bigger, and a term sheet settles it by stating the pre-money and the fully diluted share count. Some convertible instruments quote a post-money cap instead, so the habit of asking which one carries straight into later work.

    Where candidates lose it

    Candidates divide 50 by 200 instantly and say 25%. That is right for only one of the two readings, and the interviewer chose an ambiguous sentence to see whether you ask which valuation the Rs 200 crore is.

    The second slip is treating the difference as small. Five points of a Rs 250 crore company is Rs 12.5 crore of value handed over, and the extra slice keeps its weight through every later round.

    What the interviewer asks next

    • The company had 1 crore shares before the round. What price per share does each reading imply?
    • The round also creates a 10% option pool before the money comes in. What is the effective pre-money?
    • Why might a founder prefer to quote the post-money figure in a press release?