StartUp

What is Startup?

Startup is a new born or young company struggling to achieve their potential and growth. A business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

Key Challenges in Valuation of a Startup

Assumptions

Limited Historical Information available to forecast the
Projection.

Limited Comparable companies available to benchmark the Valuation of the startup

Comparable Companies

Discount Rates

Difficult the assess the risk of the startup company

Existing assets represents the small portion of the valuation so terminal value calculation is very important.

Terminal Value

How to start a Startup?

  1. Startwith a Great Idea
  2. Makea Business Plan
  3. SecureFunding for Your Startup
  4. SurroundYourself With the Right People
  5. MakeSure You’re Following All the Legal Steps
  6. Establisha Location (Physical and Online)
  7. Developa Marketing Plan
  8. Builda Customer Base
  9. Planto Change

Different stages of Startup

EARLY STAGE

  • Idea stage
  • Understanding the marketability
  • Proto type stage (Minimum Viable Product) Pre revenue stage
  • Continuous feedback in MVP Early revenue stage

GROWTH STAGE

  • Significant revenue
  • Competition increase
  • High growth in users, valuation, traction and revenue

MATURED STAGE

  • Establish dominance as market leader
  • Expansion to new products and market
  • Move towards profitability and IPO
Funding and Valuation at different stages of Startup

EARLY STAGE

FUNDING

  • Friends and Family
  • Bootstraping
  • Angle Investor
  • Incubators
  • Govt. Grants & Prog
  • Business Plan & Pitching events

VALUATION

  • Depends on founder and Idea
  • 5X ask method
  • Exit Method
  • Berkus Method
  • Scorecard Method
  • Risk Factor Summation Method

GROWTH STAGE

FUNDING

  • Venture Capitalist
  • Incubators & Accelators
  • Crowd Funding
  • Banks & NBFC

VALUATION

  • Venture Capitalist Method
  • First Chicago Method
  • Comparable companies Method

MATURED STAGE

FUNDING

  • Anchor Investors
  • Investment firms
  • Private Equity Firms
  • Public Via IPO

VALUATION

  • DCF
  • Revenue and Profitability Multiple

Income Tax benefit for Startup
80-IAC

80-IAC. Special provision in respect of specified business.—(1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for three consecutive assessment years.

54EE

Eligible startups exempt their tax on a long term capital gain if such a LTCG or a part thereof is

  1. Invested in a fund notified by the CentralGovernment within a period of six months from the date of transfer of the
  2. Themaximum amount that can be invested in the long-term specified asset is Rs 50
  3. Such amount shall be remaininvested in the specified fund for a period of 3 year. If withdrawn before 3 years
56(2)(VIIB)

If a closely held company raises funds through the issuance of its shares to an Indian mresident at a price more than its fair market value (FMV), then the amount received in excess of fair market value of shares will be charged to tax as an income from other sources in the hands of the issuer. It is popularly known as Angel Tax

Eligibility Criteria for Tax Exemption under Section 56 of the Income Tax Act:

  • The entity should be a DPIIT recognized Startup
  • Aggregate amount of paid up share capital and share premium of the Startup after the proposed issue of share, if any, does not exceed INR 25 Crore.
  • To claim this exemption, the startup has to file a declaration in Form 2 with the DPIIT along with the details of the company such as name, date of incorporation, registration/incorporation no.,  contact details, etc. A self-declaration form has to be attached With the form, in PDF format and it should be printed on the company’s letter head and digitally signed by the authorized signatory.
Startup – Valuation Methods

  1. BERKUSMETHOD – Based on an assessment of Key success factors
  2. RISK FACTOR SUMMATION METHOD – based on a base value adjusted for 12 standard risk factors
  3. SCORECARDMETHOD – based on a weighted average value adjusted for a similar company
  4. COMPARABLETRANSACTION METHOD – based on a rule of three with a KPI from a similar company
  5. BOOK VALUE METHOD – based on the tangible assets of the company
  6. LIQUIDATION VALUE METHOD – based on the scrape value of the tangible assets
  7. DISCOUNTED CASH FLOW METHOD – based on the sum of all future cash flow generated
  8. FIRST CHICAGO METHOD – based on the weighted average of 3 valuation scenario
  9. VENTURE CAPITAL METHOD – based on the expected ROI by the investor