Book 4

Valuation

The standards for how a company understands, documents, and communicates its valuation using methods appropriate to its stage and the expectations of institutional investors.

Download Book 4 (PDF)

Valuation is not a single number. It is a range of defensible estimates derived from documented methodologies applied to documented assumptions. A company that cannot explain how its valuation was derived cannot defend it. Book 4 establishes what a compliant valuation analysis contains, what methodologies are appropriate at each stage, and what the common failures of early-stage valuation practice look like when examined precisely.

Section 4.1

The Valuation Methodology Standard

No single valuation methodology produces a definitive value for an early-stage company. A compliant valuation analysis applies multiple methodologies, documents the assumptions underlying each, states the output range from each, and produces a synthesised valuation range that reflects the weight of evidence from all methodologies applied. Valuation is not a fact. It is an estimate with a range.

Discounted Cash Flow

Intrinsic valuation based on projected future cash flows discounted to present value. Most sensitive to terminal value and discount rate assumptions.

Comparable Company Analysis

Relative valuation based on multiples of similar companies. Requires documented peer selection criteria and growth rate adjustments.

Precedent Transaction Analysis

Valuation based on actual acquisition multiples paid in comparable transactions. Includes control premiums.

Venture Capital Method

Works backward from expected exit value and required investor return. Reflects how institutional investors assess value.

Berkus Method

Qualitative pre-revenue method. Assigns value to five categories of startup progress. Applicable only pre-revenue.

Scorecard Method

Semi-quantitative pre-revenue method. Adjusts a benchmark median valuation by weighted factors. Applicable only pre-revenue.

Compliance criteria

Level 1
The company maintains a written valuation analysis applying at least two methodologies appropriate to its stage. The analysis states the valuation as a range, not a single number. The key assumptions underlying each method are documented.
Level 2
All Level 1 criteria met. The analysis includes a stated range for each methodology and a synthesised range with the weight assigned to each method documented. The analysis is updated within 90 days of any material change in financial performance or market conditions.
Level 3
All Level 2 criteria met. A sensitivity analysis is performed on the two most influential assumptions. A version-controlled record of all valuation analyses is maintained. The analysis is reviewed by a qualified financial professional before any use in investor communications or transaction documentation.
Section 4.2

Discounted Cash Flow Analysis

A discounted cash flow (DCF) analysis values a company based on its own projected future cash flows, discounted to present value at a rate reflecting the time value of money and the risk of those cash flows. It is the most transparent valuation methodology because its assumptions are fully explicit, and it is the most sensitive to assumption error. For early-stage companies, terminal value typically represents more than seventy percent of the total implied enterprise value, making the terminal growth rate and discount rate the most influential inputs. A DCF whose terminal value exceeds ninety percent of implied enterprise value is not producing a valuation based on near-term cash flow prospects and must be presented with explicit acknowledgment of this dependency.

Key definitions

  • Free Cash Flow — The cash generated by operations after capital expenditures required to maintain and grow the business.
  • Discount Rate — The rate reflecting the time value of money and the risk that cash flows will not be achieved. For early-stage companies, discount rates of 30 to 70 percent are common depending on stage.
  • Terminal Value — The estimated value of all cash flows beyond the explicit forecast period. Calculated either by the Gordon Growth Model or the exit multiple method.

Compliance criteria

Level 1
Where a DCF is used, the discount rate is derived from a documented cost of equity calculation. The terminal growth rate does not exceed the long-term GDP growth rate of the primary market without explicit justification. The analysis does not apply a terminal growth rate within two percentage points of the discount rate.
Level 2
All Level 1 criteria met. The sensitivity of enterprise value to changes in the discount rate and terminal growth rate is presented in table form. The proportion of total enterprise value represented by terminal value is stated. For pre-revenue and early-revenue companies, the explicit forecast period extends at least five years.
Level 3
All Level 2 criteria met. The analysis applies both the Gordon Growth Model and the exit multiple method to calculate terminal value and states the weight assigned to each. The discount rate includes a company-specific risk premium derived from the company's risk assessment.
Section 4.3

Comparable Company Analysis

A comparable company analysis derives valuation from the multiples at which similar companies are valued in public or private markets. The peer set must be constructed using documented selection criteria applied before the multiples of candidate companies are examined. A peer set built after observing multiples introduces selection bias and does not satisfy this Standard. Growth rate and gross margin differences between the subject company and each comparable must be adjusted for before applying multiples.

Compliance criteria

Level 1
The peer set contains at least five comparable companies with documented selection criteria. The median, minimum, and maximum multiples are presented. The analysis states whether the subject company's characteristics support a multiple above or below the median, with the basis for that position documented.
Level 2
All Level 1 criteria met. Growth rate adjustments are applied to each comparable's multiple before application to the subject company. A liquidity discount is applied when public company multiples are applied to a private company, with the basis for the discount percentage documented. The peer set is reviewed and updated annually.
Level 3
All Level 2 criteria met. A regression of peer set multiples against growth rates is used to derive the appropriate multiple for the subject company. Where no sufficiently comparable public companies exist at the subject company's stage, this limitation is documented explicitly and the weight assigned to the comparable company analysis in the synthesised valuation range is reduced.
Section 4.4

Precedent Transaction Analysis

Precedent transaction analysis derives an acquisition valuation from multiples paid in completed acquisitions of comparable companies. Transaction multiples are typically higher than trading multiples because they include a control premium. Transactions more than eighteen months old must be adjusted for changes in market conditions since the transaction date.

Compliance criteria

Level 1
Where a precedent transaction analysis is performed, at least five completed transactions in comparable companies are included. The transaction date, value, and implied multiple are stated for each.
Level 2
All Level 1 criteria met. Transaction date adjustments are applied to all transactions more than eighteen months old. The analysis distinguishes between transactions by strategic acquirers and financial acquirers and the implications for the applicable control premium.
Level 3
All Level 2 criteria met. The transaction data set is updated annually. A written assessment of the likely acquirer universe for the subject company is prepared, and the transaction multiples most relevant to that universe are given higher weight.
Section 4.5

The Venture Capital Method

The venture capital method works backward from an expected future exit value to determine the maximum post-money valuation at which an investor with a given required return can invest. It reflects how institutional investors actually assess the value of an early-stage investment: by estimating what the company must be worth at exit to generate an acceptable return, and deriving the current valuation from that target.

Key inputs

  • Expected Exit Value — Derived from the company's bottom-up financial forecast and exit multiples from comparable company analysis or precedent transaction analysis.
  • Required Return Multiple — For pre-revenue and early-revenue companies, institutional investors commonly target ten to twenty times return on invested capital over a five to seven year holding period.
  • Dilution Assumption — Future funding rounds will dilute the investor's ownership. Cumulative dilution of fifty to seventy percent across all anticipated rounds is common.

Compliance criteria

Level 1
Where the venture capital method is used, the expected exit value, holding period, required return multiple, and dilution assumption are stated and the basis for each is documented.
Level 2
All Level 1 criteria met. The analysis is run under at least two sets of return requirements representing the likely range of investor expectations. The implied pre-money valuation range is stated.
Level 3
All Level 2 criteria met. The analysis is sensitivity-tested across a range of exit valuations, holding periods, and dilution assumptions. The results are presented as a matrix.
Section 4.6

Early-Stage Methods: Berkus and Scorecard

The Berkus Method and Scorecard Method are qualitative or semi-quantitative frameworks applicable only to pre-revenue companies. They are not applicable to companies with meaningful revenue, which must apply the quantitative methods in Sections 4.2 through 4.5. The Berkus Method assigns monetary value to five categories: sound idea, working prototype, quality management team, strategic relationships, and product rollout. The Scorecard Method begins with a benchmark median pre-money valuation for comparable pre-revenue companies and adjusts it using weighted scores on management strength, market size, product stage, competitive environment, and other factors.

Compliance criteria

Level 1
Where either method is applied, each category score is supported by specific evidence. The benchmark median valuation used in the Scorecard Method is sourced from transactions completed within the preceding eighteen months.
Level 2
Both the Berkus Method and the Scorecard Method are applied simultaneously, and the results of both are presented together to triangulate a range. The analysis acknowledges the inherent uncertainty of pre-revenue valuation.
Section 4.7

The Market Sizing Standard for Valuation

Market sizing is not a valuation methodology, but the plausibility of a company's growth projections depends on whether the market opportunity can support the projected revenue trajectory. A market sizing analysis that cannot support the company's projected revenue scale undermines the credibility of every quantitative valuation methodology that depends on those projections. TAM, SAM, and SOM must be derived from bottom-up calculations at Level 2 and above. The implied market capture rate at each year of the projection must be calculated and assessed for plausibility.

Compliance criteria

Level 1
A TAM, SAM, and SOM estimate is documented with the source and date of the underlying data. The basis for deriving SAM from TAM and SOM from SAM is explained.
Level 2
SOM is derived from a bottom-up calculation of reachable customers and average revenue per customer. The implied market capture rate at each year of the projection is calculated and compared to the SOM. A capture rate above ten percent of SAM within three years requires explicit justification.
Level 3
The bottom-up market sizing is validated against external data sources. The market share required to support the exit valuation assumed in the venture capital method or DCF is calculated and assessed for achievability.

Common Deficiencies in Book 4

  • A company presents its valuation as a single number without a stated range, derived from a funding round negotiation rather than a documented analysis. The figure is used in subsequent option grant pricing without a fair market value assessment.
  • The DCF terminal growth rate is set at or above the long-term GDP growth rate, producing a terminal value that implies the company will eventually become larger than the economy. No sensitivity table is provided.
  • The peer set consists of three public companies with market capitalisations above five billion pounds, each profitable and growing slowly. The subject company is pre-revenue. The median multiple is applied without adjustment for stage, growth, or profitability.
  • The Scorecard Method uses a benchmark median valuation sourced from a peak-market 2021 database. Current benchmark medians are materially lower. The date and source of the benchmark are not disclosed.
  • The market sizing slide states a TAM of one hundred billion pounds without deriving a SAM or SOM from it. The company's revenue projections imply a capture rate of zero point zero zero one percent of the TAM, making the market size irrelevant to the valuation.

Citable URL

https://ffistandard.org/standard/book-4-valuation/

Full citation: Founder Financial Infrastructure Standard, Beta v0.5, Book 4. ffistandard.org. 2026.

View citation guide →

Book 3: Capital Structure Book 5: Investor Readiness