For start-up companies, Sahlman and Sherlis (1987) propose to get the post-money value by estimating the future value of the company at the date of exit by the investor (terminal value) and discounting it at the corporate cost of capital. Inderst and Müller (2004) find that both the pre-money and the post-money valuations of start-ups are increasing functions of the degree of market competition.
the post-money evaluation must ac count for all possible types of dilution resulting from the conversion of convertible securities (debt; preferred stock) and the exercise of warrants or employee stock ownership plans (ESOP).
Consider for instance a firm with 500,000 shares outstanding, valued at $11, before new funds infusion. The company has issued warrants for 100,000 shares at $5 per share. The venture capitalist is willing invest $4,000,000.
If the unit share price is agreed to be $10 for this new investment, the investor receives $400,000 shares or 40% of the capital, corresponding to a post-money evaluation of $10,000,000 for the whole company.