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). Versus market value Importantly, a company's post-money valuation is not equal to its market value. The post-money valuation formula does not take into account the special features of preferred stock. It assumes that preferred stock has the same value as common stock, which is usually not true as preferred stock often has liquidation preference, participation, and other features that make it worth more than common stock. Because preferred stock are worth more than common stock, post-money valuations tend to overstate the value of companies. Will Gornall and Ilya Strebulaev provide the fair values of the 135 of the largest U.S. venture capital-backed companies and argue that these companies' post-money valuations are an average of 50% above their market values. See also Pre-money valuation References External links Forbes Investopedia: What's the difference between pre-money and post-money? Ryan Roberts: What is a Pre-money and Post-money Valuation? Samuel Wu: Venture Capital 101 for Startups - Valuation Joseph W. Bartlett: A Missing Piece of the Valuation Puzzle Private equity Venture capital Valuation (finance)