The use of options to assess the value of equity in start-ups*

The use of options to assess the value of equity in start-ups*

Abstract:

Start-up valuation is very hard to establish because the main valuation techniques such as the Discounted Cashv Flows (DCF) approach or the multiples valuation that exist for valuing mature companies are irrelevant to value startups. We introduce here a valuation technique based on the real option method, which takes into account the potential
of the firm to change its strategy through time and adapt to new market circumstances. We will also see that put and call options can be used as a means to reduce the symmetry
of information between founders and investors, favoring a convergence on the value seen by both parties.

Keywords: Valuation, Real Options, Start-up financing, Venture Capital.