The value of a company before an investment round — the baseline used to calculate how much ownership investors receive for their investment.
Pre-money valuation is the agreed-upon value of a company before new investment money is added. It's the starting point for calculating how much of the company investors will own after the round closes. If a company has a $10 million pre-money valuation and raises $2 million, the post-money valuation is $12 million, and investors own roughly 16.7% ($2M / $12M).
In practice, pre-money valuation for early-stage startups is more art than science. Before revenue, it's largely a negotiation based on the team, the market size, the competitive landscape, comparable company valuations, and the current fundraising environment. As companies grow and have more data (revenue, user growth, retention), valuations become more anchored to financial metrics.
Pre-money valuation matters enormously for dilution. A $1M raise at a $4M pre-money valuation (25% dilution) is very different from the same $1M at a $9M pre-money valuation (10% dilution). Understanding the pre-money valuation and its implications before signing term sheets is one of the most important things founders can do.