Key takeaways
Price is negotiated; value is evidenced.
Pre-money and post-money figures are deal terms agreed between founder and investor. They do not, by themselves, establish market value for tax, a shareholder exit or any other purpose.
Scenarios replace history.
With limited trading records, value rests on probability-weighted scenarios, the evidence behind them and a discount rate that reflects early-stage risk.
The three approaches still apply.
Market, income and cost approaches each adapt to a young business. Money already spent explains what was built; it does not set the value.
Tax and employee equity have their own rules.
ESS start-up concessions and ATO safe-harbour valuation methods apply in defined circumstances. Confirm eligibility and method with your tax adviser before relying on any figure.
Purpose decides the engagement.
A valuation for a shareholder transfer, tax or employee equity differs from a fundraising negotiation. Define the instruction, permitted users and reliance first.
A start-up can be valued—but not the way an established business is
A start-up valuation answers the same fundamental question as any other business valuation: what is this ownership interest worth, for a defined purpose, at a defined date? What changes is the evidence. An established business offers years of trading records; a start-up may offer a plan, a prototype, early customers and a bank balance that falls every month. The valuation must therefore rest on scenarios and assumptions that can be explained, rather than history that can be measured.
This guide explains how start-up valuations work in Australia: what is being valued, how the recognised approaches adapt to limited history, where a negotiated investment price differs from value, and what tax and employee share scheme rules may require. It is general information, not valuation, tax or legal advice for your circumstances.
Start with the instruction: what, for whom, at which date
Before any method is chosen, define the subject of the valuation. Valuing all of the ordinary shares in a company is a different instruction from valuing a founder's holding, a new investor's proposed interest or options under an employee share scheme. Preference shares, convertible notes and option pools can mean the equity value of the company and the value of a particular security move in different directions.
The purpose matters just as much. A valuation supporting a shareholder transfer, a tax requirement or an employee equity plan must identify permitted users and the basis of value. A number produced for a funding pitch answers a different question and should not be repurposed without checking the instruction it was prepared under.
Price is negotiated; value is evidenced
The pre-money and post-money figures in a capital raising are deal terms. They emerge from negotiation between a founder who wants to limit dilution and an investor pricing risk, and they are influenced by competition between investors, the size of the round and the rights attached to the new shares. A $5 million pre-money figure means the parties agreed to transact on that basis; it does not, by itself, establish the market value of the company for another purpose.
This distinction matters when the same company later needs a value for tax, a shareholder exit or a family law matter. A negotiated round price is evidence a valuer may consider, but it is not a conclusion that transfers automatically.
The three approaches, adapted to limited history
The International Valuation Standards recognise market, income and cost approaches. None disappears because a business is young; each is adapted to the evidence available.
Income approach: scenarios replace forecasts
A single forecast for a start-up is usually false precision. A more defensible income approach builds discrete scenarios—success, slower sustainable trading and failure—values each, and weights them by assessed probability. The discount rate must reflect the risk of the cash flows; rates applied to mature businesses do not capture early-stage uncertainty, which is one reason scenario weighting does so much of the work. Each scenario should reflect a coherent set of assumptions, with probabilities and discount rates selected consistently so that the same risks are not counted twice.
A fictional illustration: weighting the scenarios
Assume a two-year-old software business with signed pilot customers but no profits. The valuer assesses three scenarios for the whole equity, on a five-year view, discounted to the valuation date. All figures are fictional and illustrative only.
| Scenario | Assessed probability | Scenario equity value | Probability-weighted amount |
|---|---|---|---|
| Growth plan achieved | 20% | $4,000,000 | $800,000 |
| Slower, sustainable trading | 50% | $1,500,000 | $750,000 |
| Wind-down and asset realisation | 30% | $100,000 | $30,000 |
| Probability-weighted indication | 100% | — | $1,580,000 |
The $1,580,000 is not a prediction that the business will be worth that amount. It is the weighted value of the possible outcomes on the stated assumptions. Change the probabilities, the scenario values or the discount rate and the indication moves—sometimes materially. That sensitivity is why the assumptions, not the arithmetic, carry the conclusion. For how methods are selected and cross-checked more broadly, see business valuation methods.
Market approach: comparisons with caution
Comparable company and transaction evidence can inform a start-up valuation, but the adjustments are large. Revenue multiples observed in listed companies or disclosed transactions reflect businesses with proven models, different growth and different risk. Where early-stage transactions are used, the terms matter: strategic premiums, earn-outs and preference rights can make headline prices poor evidence of ordinary-share value.
The venture capital method estimates an investment value by working backwards from an assumed future exit value and required investor return. It may draw on market multiples, but its result is highly sensitive to exit assumptions, expected returns and future dilution. It should not automatically be treated as an independent conclusion of market value.
Cost approach: replacement cost is not necessarily market value
Adding up what has been spent—development costs, equipment, recruitment—describes historical cost, not value. Money spent does not create value unless it produces something a buyer would pay for, and a successful product may be worth far more than it cost to build. Reproduction or replacement cost can still be informative: it indicates what a buyer would need to spend to recreate the business, and it can act as a reasonableness cross-check. It rarely carries the conclusion on its own.
Tax and employee share schemes have their own rules
Where a start-up issues shares or options to employees, Australian tax rules can require a market value at a particular date. The employee share scheme provisions include a concession for qualifying start-up companies, and the ATO has approved safe-harbour valuation methods—currently under Legislative Instrument LI 2025/19—that give certainty when applied as directed. One method permits the company's chief financial officer or a suitable valuer with the necessary skill, knowledge and experience to determine the market value, subject to the prescribed valuation considerations and written endorsement of both the methodology and value by the company's directors; the other is a simplified net tangible asset approach. These safe-harbour methods apply only to the specified ESS start-up concession market-value test and are subject to conditions, including the directors reasonably anticipating no change of control within the following six months. They do not establish market value for unrelated taxation or transaction purposes. Eligibility conditions, the applicable method and the required evidence must be confirmed with your tax adviser; a figure adopted for a funding negotiation is not automatically acceptable for tax purposes.
Market value for tax purposes is a specific concept: the price between a hypothetical willing but not anxious buyer and seller, dealing at arm's length with full knowledge. A valuation prepared for tax must be able to show its reasoning, evidence and assumptions.
What investors' methods are—and are not
Scorecard and checklist methods, rule-of-thumb multiples for pre-revenue companies and the venture capital method all help investors compare opportunities and structure offers. They are screening and negotiation tools. Their outputs move with the assumptions fed into them, and they are not designed to produce a supportable market-value conclusion for a shareholder transfer, a tax lodgement or a disagreement between owners. Use them for what they are.
Preparing for a start-up valuation
The quality of a start-up valuation is set by the quality of its inputs. Prepare:
- The current cap table, including options, convertible instruments and any preference rights
- The financial model behind the plan, with its assumptions stated, not just its outputs
- Management accounts and bank records since commencement, however short the history
- Customer contracts, pilot agreements, pipeline evidence and churn or usage data where relevant
- Intellectual property position: registrations, assignments and key product documentation
- Founder and key-person arrangements, remuneration and dependence on individuals
- Cash position, monthly burn and funding runway
Identify gaps honestly. A valuer who knows what is missing can scope the work properly; a valuer who discovers gaps late cannot.
When an independent valuation helps
An independent valuation is most useful where the number must stand on its own: a shareholder entering or leaving, a transfer between related parties, a tax or employee share scheme requirement, or a negotiation where one side wants evidence rather than assertion. Where the interest being valued involves shareholder rights or a buyout, our shareholder valuations guide explains the instruction in more detail.
IBV prepares independent business valuations under a written Engagement Letter that sets out the purpose, scope, permitted users, Fixed Professional Fee and timing. We do not set or guarantee a fundraising price, and we do not accept expert-witness or court-appointed engagements. If you are unsure whether your situation calls for a valuation, start with a short conversation or contact us and we will tell you plainly what we can and cannot do.
Sources and further reading
Source notes
References
Frequently asked questions
How do you value a start-up with little or no revenue?
By replacing history with scenarios. The valuer defines the interest, purpose and date, then builds discrete scenarios—such as success, slower sustainable trading and failure—values each using the market, income or cost approach the evidence supports, and weights them by assessed probability. The assumptions and the discount rate, which must reflect early-stage risk, carry the conclusion.
Is a pre-money valuation the same as market value?
No. Pre-money and post-money figures are negotiated deal terms between a founder and an investor, influenced by dilution, round size, competition and the rights attached to the new shares. Market value for tax purposes is a specific concept—the price between a hypothetical willing but not anxious buyer and seller at arm's length. A round price is evidence a valuer may consider, not a conclusion that transfers automatically.
Source: ATO — Market valuation of assets
What is the venture capital method?
It estimates an investment value by working backwards from an assumed future exit value and required investor return. It may draw on market multiples, but its result is highly sensitive to exit assumptions, expected returns and future dilution. It should not automatically be treated as an independent conclusion of market value.
Can a start-up valuation be used for an employee share scheme?
The employee share scheme provisions include a concession for qualifying start-up companies, and the ATO has approved safe-harbour valuation methods under Legislative Instrument LI 2025/19. One method permits the company's chief financial officer or a suitable valuer with the necessary skill, knowledge and experience to determine market value, subject to prescribed considerations and written director endorsement; the other uses net tangible assets. The safe harbours apply only to the specified ESS concession market-value test and are subject to conditions, including the directors reasonably anticipating no change of control within the following six months. Confirm eligibility, method and evidence with your tax adviser before relying on any figure.
What discount rate applies to a start-up?
The rate must reflect the risk of the cash flows being valued. Early-stage businesses carry materially higher uncertainty than mature businesses, so rates applied to established companies do not capture that risk. This is one reason probability-weighted scenarios often do more of the work than a single forecast at a very high rate. Where failure risk is already reflected in the scenarios, probabilities and the discount rate should be selected consistently so the same risk is not counted twice.
Does the money already spent determine what my start-up is worth?
No. Historical cost describes what was spent, not what a buyer would pay. Money spent creates value only if it produces something a buyer would pay for, and a successful product may be worth far more than it cost to build. Reproduction or replacement cost can still act as a reasonableness cross-check.
Source: ATO — Market valuation of assets
What records should I prepare for a start-up valuation?
Prepare the current cap table including options and convertible instruments, the financial model with its assumptions stated, management accounts and bank records since commencement, customer contracts and pipeline evidence, the intellectual property position, founder and key-person arrangements, and the cash position with monthly burn and runway. Identify gaps honestly so the work can be scoped properly.
Will investors accept an independent valuation?
An independent valuation informs a negotiation; it does not set the price. Investors conduct their own analysis and apply their own required returns. A valuation is most useful where the number must stand on its own—a shareholder transfer, a tax requirement or an employee equity plan—rather than as a substitute for a funding negotiation.
Source: IBV — About our independence
Which IBV engagement suits a start-up valuation?
The engagement follows the purpose and who will rely on the report, not the size of the business. Owner-only planning may suit a Calculated Value from $2,450 + GST, the minimum engagement. Third-party reliance, shareholder changes and related-party transfers normally require at least Limited Scope, fixed at $4,950 + GST; Full Conclusion of Value is quoted. Restrictions on procedures or evidence may affect the conclusion and its suitability, and a more extensive valuation engagement may produce a different result.
How is a start-up valuation different from valuing an established business?
The question is the same—what is this interest worth, for this purpose, at this date—but the evidence differs. An established business offers trading history that can be measured; a start-up requires scenarios and assumptions that can be explained. The recognised market, income and cost approaches still apply, adapted to the evidence available.
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