For correctly analyzing the true worth of any business is a cumbersome task; you need to correctly review the company's balance sheets, its operating margins, expenses and much more. More than often, a person might not be able to correctly assess these things. In such circumstances it is advisable that you take help of some professional. Last year when I was selling my 6-year old IT company, I had hired the services of KBS Corporate, who helped me get the optimum price for my business. Though, I am not sure if they deal in pre-money valuation or not, but I will advise you to contact them and discuss your situation with them.

No way to answer that. You need to have a value of the business based on something - say projected cash flows, the value of any intangible assets you've developed, etc. If the VC knows what they're doing, they already have a valuation; the negotiation will be what % of the business they get for their $200K. So, if you think it's worth $1MM, they'd get 20%. If they think it's worth $250K they'd get 80%

I have founded a company with the investment of $250,000. I have been investing and developing this company for 2 years. Company is not in market yet and needs external funding of $200,000 to be successful.

Now the venture capitalist is interested in investing but needs me to provide Pre-Money Valuation.

My question is what would be my company's Pre-Money Valuation? Will it be the amount I have already invested that is $250,000? Will there be any increment in Pre-Money Valuation for my 2 years efforts given to this company? Or I can mark Pre-Money Valuation as $1 M?