Start-up Valuation Methods
When cash flows are a guess, value the exit, the scenarios or the last round, and say why.
A start-up is the case where the usual tools fail. There is little history, cash flows are negative or uncertain, and comparable companies are rare. ICAI VS 103 names start-ups as an example where a valuer may use other approaches instead of, or alongside, the income approach.
The legal pressure has also changed. The angel tax under section 56(2)(viib) of the Income-tax Act, 1961 no longer applies from assessment year 2025-26, and the Income-tax Act, 2025 has no equivalent. A start-up raising money still needs a valuation, but for FEMA, the Companies Act and the investors, not for that tax.
You save ₹600
- Full-length mocks
- Case-study practice
- Law module sets
One payment, no subscription · Valid for 2 months
The Methods
- Venture capital method
- Estimate the value at exit, discount it to today at the investor's target return, and work out the stake the investment buys.
- Price of recent investment
- Use the price of a recent arm's length funding round, adjusted for what has changed since and for the rights attached to the new shares.
- Probability weighted expected return (PWERM)
- Value the equity under several exit scenarios (IPO, sale, failure), weight each by its probability and discount.
- First Chicago method
- A simpler scenario method: success, base and failure cases, each valued and weighted by probability.
- Option pricing method
- Treats each class of shares as a call option on the company's equity value; used to split value between preference and ordinary shares.
- Milestone analysis
- Adjusts value as the company reaches or misses milestones such as a product launch, regulatory approval or revenue target.
- Scorecard and Berkus methods
- Pre-revenue rules of thumb that adjust an average pre-money value for team, product, market and similar factors. Useful as a cross-check, not as the only method.
Worked Example: the VC Method
Illustration only. A Pune health-tech start-up seeks ₹20 crore. The fund expects an exit in 5 years at ₹500 crore and wants a 40% annual return.
- 1
Discount the exit value
1.40 to the power 5 = 5.378. Post-money value today = 500 ÷ 5.378 = ₹92.97 crore.
- 2
Work out the stake
20 ÷ 92.97 = 21.5%. The fund asks for about 21.5% of the company after the round.
- 3
Back out pre-money value
92.97 − 20 = ₹72.97 crore. This is the value of the company before the new money.
- 4
Adjust for later dilution
If later rounds will dilute the fund, it needs a larger stake now to hold 21.5% at exit. Ignoring dilution overstates the pre-money value.
Worked Example: Scenarios
Illustration only. Equity value at exit, already discounted to today, in ₹ crore.
Success (strategic sale)
Value
300
Probability
25%
Weighted
75.0
Base case
Value
120
Probability
50%
Weighted
60.0
Failure
Value
10
Probability
25%
Weighted
2.5
Expected value
Value
Probability
100%
Weighted
137.5
| Scenario | Value | Probability | Weighted |
|---|---|---|---|
| Success (strategic sale) | 300 | 25% | 75.0 |
| Base case | 120 | 50% | 60.0 |
| Failure | 10 | 25% | 2.5 |
| Expected value | 100% | 137.5 |
Quick practice on loss assessment and valuation basics. No signup.
Rules That Still Apply
- check_circleFEMA: shares issued to a foreign investor by an unlisted company cannot be priced below fair value certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant.
- check_circleCompanies Act section 62(1)(c): a preferential issue for cash or other consideration needs a price determined by a registered valuer's report.
- check_circleRule 11UA history: the 2023 amendment let start-ups value shares for non-resident investors by comparable company multiple, PWERM, option pricing, milestone analysis or replacement cost, with a 10% safe harbour. It mattered only for the angel tax and now matters for history and old assessments.
How the Valuation Examination Tests This
Expect VC-method arithmetic (post-money, stake and pre-money) and questions on which method suits a pre-revenue company. The common slips are confusing pre-money with post-money, and treating the price per share in a round with liquidation preferences as the value of every ordinary share. On the law, watch for options that still treat section 56(2)(viib) as live.
FAQs
What is the difference between pre-money and post-money valuation?expand_more
Pre-money is the value before the new investment; post-money is pre-money plus the new money. The investor's stake is the investment divided by the post-money value.
Is angel tax still applicable to start-ups in India?expand_more
No. Section 56(2)(viib) of the Income-tax Act, 1961 was switched off from assessment year 2025-26, and the Income-tax Act, 2025, in force from 1 April 2026, does not carry it over. Old assessments can still raise it.
Can DCF be used to value a start-up?expand_more
It can, but the forecasts are highly uncertain, so valuers usually support or replace it with scenario-based methods or the price of a recent round. ICAI VS 103 recognises this for start-ups.
Why does a start-up's preference share round not value its ordinary shares at the same price?expand_more
Investors' preference shares often carry liquidation preferences and other rights. The round price reflects those rights, so ordinary shares are usually worth less per share; option pricing or scenario methods split the value between classes.
Next steps
- DCF valuationarrow_forward
- Comparablesarrow_forward
- FEMA Pricingarrow_forward
- SFA mock testarrow_forward
Free study material and a free diagnostic test.