Capital Raising & Financing Valuation Services

Valuation for an Equity Raise

Pre-Money, Post-Money and What They Actually Mean

The pre-money valuation is the agreed value of the company before the new money comes in; post-money is pre-money plus the investment. The dilution follows arithmetically — but only if the cap table is what everyone assumes it is.

In practice the headline valuation frequently overstates the position for existing holders, because of what sits between the headline and the actual economics:

The option pool. Where investors require a pool to be established or topped up pre-money, the dilution falls entirely on existing shareholders. A “$10 million pre-money” with a 15% pool created pre-money is a materially different deal from the same number with the pool created post-money.

Convertible instruments already on issue. Convertible notes, SAFEs and advance subscription agreements from earlier funding convert at the round, often at a discount or a capped valuation, diluting more than their face amount suggests.

Preference rights. A liquidation preference — particularly a participating preference or a multiple — means the preference shares are worth more per share than the ordinary shares, so the headline price per share is not the value of an ordinary share. This is the point that matters most for employee equity and for founder economics, and it is the one most often missed.

Valuing an Early-Stage Company

For a pre-revenue or early-revenue company there is no maintainable earnings figure to capitalise, so the orthodox methods have limited application. What is defensible depends on the stage:

Recent transaction evidence — Where there has been a genuine arm’s length round, that is the strongest evidence available, subject to allocating across share classes and to whether anything material has changed since.

Comparable transaction analysis — Multiples or absolute values from comparable Australian early-stage rounds in the same sector and at the same stage, where evidence is available.

Discounted cash flow with scenario weighting — For companies with a definable path to revenue, a probability-weighted set of scenarios rather than a single forecast. The scenario weights carry the analysis and need to be reasoned.

Cost or asset-based approaches — For very early companies, replacement cost of the technology developed or net asset backing, generally as a floor rather than a conclusion.

Venture capital method — Working backward from an expected exit value and required return to an implied present value. Useful as a cross-check on what a round price implies about exit expectations.

For any of these, a range with the drivers identified is more useful and more defensible than a point estimate.

Allocating Value Across Share Classes

Where the capital structure has preference and ordinary shares with different rights, the total equity value must be allocated across the classes before any individual class has a value.

Waterfall analysis distributes value in order of liquidation priority — appropriate where a liquidity event is near or where value sits at or below the aggregate preferences.

Option pricing method (OPM) treats each class as a call option on enterprise value with strike prices set by the preferences, allocating value using a Black-Scholes framework with an expected time to liquidity and volatility. Appropriate for earlier-stage companies where exit timing is uncertain.

OPM backsolve calibrates the model to the price actually paid in the round — the known data point — to solve for implied total equity value, then derives the value of every other class including the ordinary shares. This is the standard approach where a recent round provides the anchor, and it is what produces a defensible ordinary share value for ESS purposes.

The output that matters for most companies is the ordinary share value, because that is what employees receive and what the ESS concessions are measured against. Applying the preference round price to ordinary shares overstates it, sometimes substantially.

ESIC — Early Stage Innovation Company

The ESIC provisions give qualifying investors a 20% non-refundable carry-forward tax offset on their investment, and a modified CGT treatment under which gains on shares held for at least 12 months and less than 10 years are disregarded. For a sophisticated investor the offset is capped, and for a retail investor both the offset and the eligible investment amount are capped at lower levels — the current caps should be confirmed, as they are set by the legislation.

The concession is available to the investor, but eligibility depends on the company satisfying two sets of tests at the time the shares are issued.

The Early Stage Test

The company must satisfy all of the following in relation to the relevant income year:

• Incorporation or registration — Incorporated in Australia within the last three income years, or within the last six income years with total expenses of $1 million or less across those years, or registered in the Australian Business Register within the last three income years
• Expenditure — Total expenses of $1 million or less in the prior income year
• Assessable income — $200,000 or less in the prior income year
• Not listed on any stock exchange in Australia or elsewhere

These are objective and generally straightforward to assess from the financial statements. The trap is timing: the tests refer to the prior income year, so a company approaching the thresholds needs to know where it sits before the shares are issued, not after.

The Innovation Test — Two Routes

The company must also satisfy either the principles-based test or the 100-point test.

The 100-point test is objective and, where a company can meet it, materially more certain. Points are awarded for specified criteria including a proportion of expenses on eligible R&D activities, receipt of an Accelerating Commercialisation grant, completion of an eligible accelerator programme, prior third-party equity investment at or above a specified level, and holding or licensing certain granted patents or plant breeder’s rights. A company reaching 100 points satisfies the innovation test without further assessment.

The principles-based test requires the company to demonstrate all five of the following:

1. It is genuinely focused on developing a new or significantly improved innovation for commercialisation
2. The business relating to the innovation has high growth potential
3. It can demonstrate the potential to scale the business
4. It can demonstrate the potential to address a broader market than the local market
5. It can demonstrate the potential to have competitive advantages for that business

Each of the five requires evidence. This is where ESIC positions most often fail on review — not because the company is not innovative, but because the file contains assertions rather than substantiation. What is needed is documented evidence: the nature of the innovation and how it differs from what exists, market sizing with sources, the scalability characteristics of the business model, the specific international markets addressed and the basis for that, and the competitive advantages with reference to the actual competitive landscape.

Documentation and Reporting

Contemporaneous documentation is the whole game. The tests are applied at the time the shares are issued, and if the position is reviewed the company must substantiate that the tests were met at that time. Evidence assembled two years later, after an investor has claimed the offset and the ATO has asked a question, is worth a fraction of the same evidence assembled before the raise.

The company must also report to the ATO on new shares issued to investors who may qualify, by the required date after the end of the income year. Late or incomplete reporting attracts penalties independently of whether eligibility is made out.

Where certainty matters, an ATO ruling is available. A company can apply for a private ruling on whether it qualifies under the principles-based test. This takes time and needs to be factored into the raise timetable, but for a significant round where investors are relying on the offset, it converts an assessment into a binding position.

What Valuation Contributes

ESIC eligibility is primarily a factual and evidentiary exercise rather than a valuation one, and it is properly led by a tax adviser. Where valuation work supports it:

• Market sizing and growth potential — Quantifying the addressable market and the growth trajectory with sourced evidence, for limbs 2, 3 and 4 of the principles-based test
• Competitive advantage substantiation — Analysis of the competitive landscape and the basis for advantage, for limb 5
• Prior investment thresholds — Establishing that a prior equity investment met the level required for points under the 100-point test
• Scalability analysis — Unit economics and the operating leverage in the business model

Employee Share Schemes at a Raise

A raise is the natural moment to deal with employee equity, and the two interact directly.

Where the start-up concession under Subdivision 83A-33 is being relied on, shares must be issued at no more than a 15% discount to market value and options must have an exercise price at or above the market value of the underlying share at grant. That requires a market value for the ordinary shares at grant date — which, as above, is not the preference round price.

The company must also be unlisted, incorporated for less than 10 years, an Australian resident, and have aggregated turnover at or below the specified threshold. Where those conditions are met and the discount limit is satisfied, no amount is assessable at grant and the interest falls into the CGT regime.

Separately, AASB 2 requires a grant-date fair value for accounting purposes, measured on a different basis from the tax market value. Both are needed, and one number will not serve for both.

The practical point: get the ordinary share valuation done at the raise, and use it for both purposes with the basis for each documented. Doing it at the raise costs a fraction of doing it separately later, and it means the grants can be made immediately after the round rather than waiting.

Convertible Instruments and Warrants

Instruments issued in a raise frequently need valuing in their own right.

Convertible notes and SAFEs — Where a discount, a valuation cap or both apply, the instrument is economically an equity option and its value is not its face amount. This matters for the issuer’s accounting treatment under AASB 9 and AASB 132, for the dilution analysis, and for the holder’s own reporting.

Warrants and options issued to investors or lenders — Require an option-pricing model, with the underlying ordinary share value derived from the allocation analysis rather than taken as the round price.

Preference share terms — Where the preference carries a dividend entitlement, a participation feature, a redemption right or an anti-dilution ratchet, the effect on relative value between classes needs modelling. An anti-dilution ratchet in particular can transfer substantial value from ordinary holders on a subsequent down round, and founders frequently accept one without that being quantified.

Debt Financing

Lenders and debt providers require different work from equity investors.

Enterprise valuation for facility sizing — Where lending is against business value rather than specific assets, the lender’s view of enterprise value determines the facility size and often the pricing. An independent valuation supports the borrower’s position in that assessment.

Security and collateral valuation — Valuing the specific assets over which security is taken, including intangibles, plant, and receivables.

Covenant headroom analysis — Modelling the proposed covenants against forecast performance to establish the headroom and identify which covenant binds first under stress. This is worth doing before signing rather than discovering at the first test date.

Enterprise value coverage — For mezzanine, unitranche and other subordinated debt, assessing whether enterprise value provides sufficient coverage for the position, which is the analysis the lender itself performs.

Common Failure Points

• Ordinary share value taken as the preference round price, overstating employee equity and potentially defeating the ESS start-up concession
• ESIC principles-based test asserted, not evidenced, leaving investors exposed on review
• ESIC thresholds not checked before the raise, when the prior-year expense or income test was already failed
• ESIC reporting deadline missed, attracting penalties independently of eligibility
• Option pool created pre-money without the dilution being understood by existing holders
• Convertible instruments not modelled into the dilution analysis
• Anti-dilution ratchet accepted without quantifying the transfer on a down round
• ESS grants deferred until after the round, when the valuation was available at the round
• One valuation used for both Division 83A and AASB 2 purposes
• Covenants agreed without headroom analysis, with the binding constraint discovered at the first test
• No contemporaneous documentation, leaving both the ESIC and ESS positions to be reconstructed under review

InteleK’s Approach

Our accredited valuers support capital raising and financing with the valuation work the transaction and its tax consequences depend on. Here’s what sets our process apart:

Ordinary Share Value Derived Properly — Using OPM backsolve calibrated to the round price to allocate across share classes, producing the ordinary share value that ESS grants and founder economics actually depend on, rather than applying the preference price to everything.

Both ESS Numbers, Separately — The Division 83A market value and the AASB 2 grant-date fair value, delivered as distinct conclusions with the basis for each documented, so grants can be made immediately after the round.

ESIC Evidence Assembled Before the Raise — Market sizing, scalability and competitive advantage analysis with sourced evidence, prepared contemporaneously and structured for the file rather than for a brochure. Where the position is marginal, we say so before the shares are issued.

Working With Your Tax Adviser on ESIC — Eligibility is a tax question and we do not lead it. We provide the quantitative and market evidence the principles-based test requires and identify where the 100-point test may be the more certain route.

Dilution Modelled Completely — Option pool, existing convertibles, the round itself and the preference stack, so what the headline valuation means for each existing holder is visible before the term sheet is signed.

Instrument Valuation — Convertible notes, SAFEs, warrants, and preference terms including ratchets and participation features, valued and their effect on relative class value quantified.

Lender-Facing Valuations — Enterprise and collateral valuations prepared for the assessment the lender will actually perform, with covenant headroom analysis run before the facility is agreed.

Timed to the Raise — Engaged before the round closes wherever possible, so the valuation informs the terms rather than documenting them. A valuation dated after the shares are issued cannot support an ESS exercise price that was already set.

Working With Your Advisers — Alongside your corporate adviser, tax adviser, legal counsel and accountant. The valuation is one input into a raise that has several moving parts, and it works best when it is not the last one to arrive.