Why Valuation for start-ups?
Valuation matters to every start-up because it helps in deciding the amount of equity an entrepreneur has to give to an investor in exchange for requisite funds. This implies that if a company has a higher valuation, it has to give a lesser amount of equity or shares to an investor in exchange for seed investment. Not only for entrepreneurs, but start-up valuation is also vital from investors’ point of view because it helps them gauge the amount of return, they will receive on their invested amount.
Legal provisions on valuation
Following are the provisions under various laws which talks about valuation while issuance of fresh shares –
Under Companies Act 2013 (w.e.f. 1st Feb 2019)
Section 247 provides that the for the purpose of valuation of shares under companies Act 2013, only a report issued and signed by registered valuer shall be acceptable under this law.
Under Income Tax Act 1961 (w.e.f. 24th May 2018)
Section 56 provides that for the purpose of arriving the fair value of shares, only merchant banker report shall be allowed.
Under FEMA Regulation
The fair value of shares needs to be duly certified by a CA or a SEBI registered merchant banker.
In the current scenario, to comply with 3 prevailing laws affecting such valuation, a company will be required to get a separate valuation report from Merchant Banker & Registered Valuer.
A company shall not require a valuation report from a merchant banker if the company meets all the below parameters:
- The company is a start-up recognized by DPIT under Start-up India
- Has applied for Angel Tax Exemption under section 56 of income tax and has file duly signed declaration to DIPP that it fulfils the conditions after which DPIIT shall forward the same to the CBDT.
How can Startup Movers assist you in valuation?
- Assistance in formalizing the projections for the
- Study the industry in which the organization
- Analysis of the projections/ business plan; and discussions with management to gather clarity around the
- Selection of appropriate approach(es) and methods to be used for valuation based on above (DCF under Income approach is the most suitable method of valuation for startups)
- Identify the risk-free rate as on the valuation
- Identifying multiples, and computing value
- Value conclusion
- Submission of Draft Valuation Report and discussion thereupon
- Issuance of Final Report