Valuation is an important consideration not only to fix the price, but for investors to determine their ownership interests after the investment.
Pre-Money Valuation is the monetary value of the company prior to investment. The most common methods used in startup valuation include (1) market multiples such as the standard earnings multiple method, (2) discounted cash flow, (3) cost-to-duplicate, and (4) comparables.
Post-Money Valuation, on the other hand, is the sum of the pre-money valuation and the amount invested. Thus, if a startup company has a pre-money value of $1,000,000 and it received investments of $250,000, then it
will have a post-money value of $1,250,000.
Other terminologies include up, down, and flat rounds, which are all used to compare the value of the current financing round relative to the previous round. For example, a flat round means that the shares issued at the current financing round are at the same valuation as the previous round.