Dear reader,
The current VC literature states that pre- and post-money valuations differ with the contemplated aggregate investment amount.
Modigliani miller said that in an efficient market, the value of a firm is unaffected by how that firm is financed (capital structure irrelevance).
What am I missing?
Let's say you have 0 dollars. Then I give you $100. You are now worth $100 more.
That is literally what is meant by post-money
Not sure what exactly you're asking, but post money is just a term people use to include any additional capital that is funded to the balance sheet rather than to sellers. Simple example: pre-money valuation of $110M (all goes to seller save for some fees assuming they own 100% of the business), then another $10M is funded to the balance sheet by the buyer for working capital, strategic growth projects, etc., so post money valuation is $120M.
Has nothing to do with M&M.
Then the term "valuation" is used sloppy and is in fact not a real valuation because without improving company operations by just injecting cash ceteris paribus a real EV can not increase (as mentioned in the other comment, EV excludes cash), because a cash injection ceteris paribus does not affect FCF
There’s no science needed. Pre money and post money are just labels to avoid confusion in terms of whether someone is talking about before the funding or after.
Say an all equity business is worth $5m and someone invests $1m on that valuation. The business is the same it was a moment ago, except it now has another $1m in cash and is thus worth $6m. Pre money is 5m, post money is 6m.
That’s all those terms mean.
Now if there’s another discussion happening here, then go have it but it has nothing to do with pre vs post money.
Yeah I agree with that. It won’t necessarily be the same amount of the cash. Like say a company is worth $5m today (EV) and is highly distressed. The $5m is largely option value, ie it’s worth zero if it doesn’t get rescued but its worth say $50m if it’s rescued which is very unlikely. So the $5m is just a weighted average of those two outcomes. Now someone surprises everyone and rescues it with a $10m injection. Classic logic would say EV is unchanged and equity value has risen by $10m. But I would say the removal from distress has taken the EV back to the $50m upside operating scenario.