How to value unlisted shares using DCF: startup guide

Reviewed by Team BuyUnlistedShares Research Desk

Valuing unlisted shares with the discounted cash flow (DCF) method involves estimating the present value of a company’s expected future free cash flows. For early‑stage startups, this requires projecting cash flows, selecting an appropriate discount rate, and adding a terminal value. The result gives an indicative intrinsic value per share.

What are the key inputs needed for a DCF of an early‑stage startup?

A DCF model for a startup needs the following components:

• Forecast period – usually 5 to 10 years of projected free cash flows.
• Free cash flow (FCF) for each year – cash generated from operations after capital expenditures and changes in working capital.
• Discount rate – reflects the risk‑adjusted return required by equity holders.
• Terminal value – captures the value of cash flows beyond the explicit forecast period.
• Number of shares outstanding – to convert the total equity value into a per‑share figure.

How do you forecast free cash flows for a pre‑revenue or early‑revenue startup?

Forecasting starts with revenue assumptions, then subtracts operating costs, taxes, capital expenditures and changes in working capital. Because early‑stage firms often have limited historical data, analysts rely on industry benchmarks, management guidance and scenario analysis.

Illustrative example (numbers are purely illustrative and not a recommendation):

• Year 1 revenue: ₹5 lakh
• Year 2 revenue: ₹12 lakh (140% growth)
• Year 3 revenue: ₹20 lakh (67% growth)
• Operating expenses: 70% of revenue each year
• Depreciation & amortisation: ₹0.5 lakh per year
• Capital expenditures: ₹0.3 lakh per year
• Change in working capital: 10% of revenue increase each year
• Tax rate: 22% (assuming positive taxable income)

From these inputs, free cash flow for each year is calculated as:

FCF = (Revenue – Operating Expenses – Depreciation) × (1 – Tax Rate) – Capital Expenditures – Change in Working Capital

The resulting FCF series is then discounted back to present value.

Which discount rate should you use for an unlisted startup?

The discount rate is often built using the Capital Asset Pricing Model (CAPM) adjusted for private‑company and startup‑specific risks:

• Risk‑free rate – typically the yield on a 10‑year government bond.
• Equity risk premium – historical excess return of equities over risk‑free assets.
• Beta – measure of systematic risk; for private startups a proxy beta from comparable listed firms is used, often adjusted upward.
• Size premium – additional return expected for smaller companies.
• Startup‑specific premium – accounts for higher uncertainty, limited track record and illiquidity.

One may sum these components to arrive at a discount rate that reflects the risk profile of the particular venture.

How is the terminal value calculated in a startup DCF?

Two common approaches are:

• Perpetuity growth model – assumes free cash flow grows at a constant low rate (e.g., GDP growth) forever. Terminal Value = FCF_n × (1 + g) / (r – g), where n is the final forecast year, g is the perpetual growth rate and r is the discount rate.
• Exit multiple method – applies an industry‑based EBITDA or revenue multiple to the final year’s metric. Terminal Value = Metric_n × Multiple.

Because startups lack stable cash flows, the terminal value often represents a large share of the total value; therefore, its assumptions should be examined carefully.

How do you derive the per‑share value and test the sensitivity of the result?

Steps to obtain the equity value per share:

1. Calculate the present value of each year’s forecast FCF using the chosen discount rate.
2. Calculate the present value of the terminal value.
3. Sum these present values to get the enterprise value.
4. Subtract any net debt (debt minus cash) to arrive at equity value.
5. Divide the equity value by the total number of shares outstanding to get the intrinsic value per share.

Sensitivity analysis helps understand how changes in key inputs affect the outcome. Typical variables to test:

• Discount rate (±1‑2 percentage points)
• Terminal growth rate (±0.5 %)
• Revenue growth assumptions in the forecast period
• Operating margin assumptions

By observing the range of resulting per‑share values, investors can gauge the robustness of the valuation under different scenarios.

Frequently Asked Questions

Question : Is DCF suitable for startups with little or no historical earnings?

Answer : Yes, DCF can be applied to early‑stage firms by focusing on projected cash flows rather than past profits. The reliability of the model depends on the quality of the forecasts and the reasonableness of the assumptions.

Question : How do I choose a realistic discount rate for a private startup?

Answer : Start with the risk‑free rate, add an equity risk premium, then adjust for beta, size and startup‑specific risk. Many analysts use a range (e.g., 15%‑25%) to reflect the high uncertainty typical of unlisted ventures.

Question : What if my startup is expected to be acquired rather than continue forever?

Answer : In such cases, the exit multiple method may be more appropriate than perpetuity growth. Choose a multiple based on comparable transactions or public companies in the same sector.

Question : How important is the terminal value in the overall valuation?

Answer : For startups, the terminal value often contributes a large portion (sometimes 50%‑70%) of the total present value. Hence, small changes in terminal‑value assumptions can significantly affect the result.

Question : Can I use DCF alongside other valuation methods?

Answer : Many practitioners use DCF as one tool among others (such as market‑based multiples or venture‑capital method) to cross‑check conclusions. Discrepancies between methods can highlight areas needing deeper investigation.

Question : What are the main risks of relying on a DCF model for unlisted shares?

Answer : The primary risks stem from forecast uncertainty, the choice of discount rate, and terminal‑value assumptions. Illiquidity and limited public information also add layers of risk that a pure financial model may not capture.

Question : How often should I revisit the DCF assumptions?

Answer : Assumptions should be updated whenever there is material new information — such as a funding round, major product launch, change in market conditions, or revised financial projections.

This article was reviewed by Team BuyUnlistedShares Research Desk, whose reviewers hold NISM Series XV (Research Analyst) certification and NISM Series V-A (Mutual Fund Distributor) certification. The desk is NOT a SEBI-registered Research Analyst or Investment Adviser. Nothing in this article constitutes investment advice or a recommendation to buy, sell, hold, or avoid any security. Investments in unlisted securities carry significant liquidity, regulatory, and listing-timing risks. Consult a SEBI-registered Investment Adviser for personalized financial planning.