Is it Possible to Avoid Crypto Taxes in India?
Although unregulated, cryptocurrency is picking up pace in India. During the Union Budget 2022, Finance Minister Nirmala Sitharaman announced a flat 30 percent tax on the income and gains earned through cryptocurrencies and the sale of virtual digital assets. An additional one percent TDS also exists on every crypto transaction. Many among India’s crypto community have termed it regressive and detrimental. It has led many to ask if there’s a way to avoid paying crypto taxes in India. Let’s see if it is possible, or is it only a hope. What is Cryptocurrency? Ok. Let’s begin with the basics. Cryptocurrency is a virtual payment system. It is a peer-to-peer (P2P) system that can enable anyone to send and receive payments. Cryptocurrencies are fully digital entries to an online database that describe a particular transaction. Having cryptocurrency in your digital wallet may eliminate the need to carry physical currency if the receiver accepts it in place of real money. Cryptocurrency uses encryption to verify transactions. It involves advanced coding to store and transmit cryptocurrency data between wallets and public ledgers. Encryption helps enhance the safety and security of cryptocurrency. How Does Cryptocurrency Work? Here’s an overview of how cryptocurrency works for those who are new to it. Cryptocurrencies operate on a distributed public ledger called blockchain – a record of all transactions updated and held by the holder of the currency. The system creates units of cryptocurrency through mining. Users can buy currencies from brokers and store and use them through their cryptographic wallets. Is it Possible to Avoid Taxes on Cryptocurrency in India? People want to make the most of their investments. Hence, a flat 30 percent tax can sound a bit too much. As a result, many have been asking such questions. So, is it possible to avoid cryptocurrency taxes in India? The answer is no. There’s no legal way to avoid paying the 30 percent tax levied by the Indian government on cryptocurrencies and other virtual assets. If someone says there’s a way to avoid taxes on cryptocurrencies, beware, as by doing so, you might end up in a legal hassle. According to experts, you will have to pay the required taxes regardless of whether you trade on centralized or decentralized exchanges. The decentralized thing may create some hope among people looking to avoid crypto taxes. But, beyond technology, there’s also a legal wall that will prevent the escape. Many consider it a loophole. But the question is, wouldn’t the government already know about it and take action against it to avoid expanding the loophole? The moment you convert your crypto gains to fiat, you will be liable to pay taxes. Besides, amidst the age of technology, it would be silly for anyone to think or assume that the government or tax authorities wouldn’t be aware of their transactions. So, thinking that there would be some way to avoid taxes is impractical. Remember, it is legally and ethically incorrect to avoid taxes that contribute to the country’s development. So, it is advisable to follow government-imposed rules and regulations concerning tax payments.
SME IPO Listings Key Requirements and Eligibility Norms
In India, IPOs can form an excellent opportunity for SMEs to raise money and get listed on the country’s stock exchanges. But like every other company eyeing an IPO, SMEs also have a set of key requirements and eligibility norms to adhere to while applying for an IPO. Let’s see what they are for both BSE and NSE. To be listed, the company will be incorporated as a Public Company under the Companies Act, 1956 or 2013, or the entity will be converted into a public company. BSE SME platform (BSE) and NSE EMERGE Platform (NSE) both have their unique eligibility criteria for SME listing, along with the SEBI Guidelines given for the listing. Here’s more to both the listing criteria. Eligibility Criteria BSE Listing Requirements NSE Listing Requirements Post Issue Capital (FV) Minimum: INR 3 Cr Maximum: INR 25 Cr Maximum: INR 25 Cr Track Record · Net Tangible Assets: INR 3 Cr · Net Worth: INR 3 Cr (INR 15 Cr for broking firms) · Distributable profits in terms of Section 123 of the Companies Act 2013 for a minimum of 2 years out of preceding 3 completed FYs or the net worth shall be at least INR 5 Cr. Profit before tax of INR 5 Cr for broking firms. · Track record of a minimum of three years · The company should have positive cash accruals (EBDT) from operations for a minimum of 2 financial years preceding the application. Additionally, the company’s net-worth should be positive. Other Requirements · Compulsory facilitation of trading in Demat securities · Compulsory corporate website · There should be a certificate that there is no winding petition or reference to BIFR · No change in promoter in preceding one year · Promoters to attend to the interview with the Listing Advisory Committee · The Company has not been referred to Board for Industrial and Financial Reconstruction (BIFR). · There shouldn’t be any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant. · There is no winding up petition against the applicant company that has been accepted by a court. Key Norms of SEBI for SME Listing Here are the key norms of SEBI for SME listing. A public shareholding of at least 25% Minimum application amount/ trading lot of INR 1 lakh Minimum number of subscribers in IPO should be at least 50 investors Market making – through exchange registered market for a minimum of three years Underwriting – 100% is compulsory, out of which 15% should be done by the MB in his own account Offer document – It isn’t subject to SEBI observation Now what is the criteria to migrate to move SME to Mainboard. The paid up capital of the company must be INR 10 Cr The company should be listed on the SME platform for a minimum of two years <500 shareholders – T to T group An approval from 2/3 of non-promoter shareholders is necessary If you are an SME looking for end-to-end help to raise an IPO, connect with ANGCA. We have the experience and expertise to help you through the SME IPO process. To know more or connect with our experts, call us at +91-7722063311 or write to us at ang@angca.com.
How does an ESOP Scheme Works for Listed and Unlisted Companies?
ESOP can work wonders if you know how to make them work for your company, regardless of whether listed or unlisted. However, ESOPs work in different ways for both these company types. Let’s glance through both. Employee Stock Option Plan, better known as ESOP in corporate parlance, refers to giving stock options to employees, coupled with an ownership interest in the company. Usually, startups experiment with ESOPs considering they are in the early growth stages and operate within a restricted budget. The company’s employees can buy its shares at a predetermined price. How do ESOPs Work in Listed Companies? In the case of listed companies, the ESOP scheme is termed the Employee Stock Purchase Scheme (ESPS). According to Rule 2 Sub Rule 4, companies can offer shares under ESPS only when they are listed. However, ESPS is a bit different from ESOP. ESPS does not provide a right but allows the respective company’s employees to buy the shares at a discounted price at a predetermined rate. The discount could be as low as 15 percent from the market share price. Usually, shares in ESPS can be bought from the after-tax money the employees get. Another difference between ESOP and ESPS is that ESOP is a remuneration plan. However, on the other hand, ESPS involves employees contributing to the plan by accepting payroll deductions between the offer date and the purchase date, thus saving for the purchase. As per SEBI guidelines, ESPS aspects include, Share issuing procedure The fundamental action of share purchase Compliance Resolutions Eligibility Board duties, etc. stay similar to the ESOP Scheme. How do ESOPs Work in Unlisted Companies? The Companies Act, 2013 and (Share Capital and Debenture) Rules state the provisions for offering an ESOP to employees of unlisted companies. Section 62 (1) (b) of the 2013 Act states that the company can create the ESOP scheme only according to a Special Resolution. Rule 12 of the (Share Capital and Debenture) Rules provides the procedure of creating such a scheme and the protocols to adhere to. Let’s quickly run through the procedure. For a detailed explanation, connect with Valuation India. Recognizing Employees As per Rule 12 of the (Share Capital and Debentures) Rules, 2014, private limited companies can only issue ESOPs to employees who are, Permanent employees staying in or outside India Directors of the company, irrespective of whether whole-time or not but excluding independent ones Employees of a subsidiary or holding company staying in or outside India, except for a promoter or a director, who directly or indirectly holds over 10% of the equity shares Special Resolution After recognizing employees according to Rule 12, the company’s shareholders must approve ESOP through a special resolution in the general meeting. The company should also attach specific disclosures in the notice given for ESOP approval. Some of them include, Total number of shares granted Recognized classes of employees Exercise date Vesting period Lock-in period Vesting date Exercise dates and periods in the event of termination, resignation, etc. The maximum number of options to be given per employee. Separate Resolution The shareholder approval in the case of ESOP being given to a subsidiary or holding companies or ESOP equivalent to or exceeding 1% of the issuing capital being given to employees should be taken by the way of a separate resolution. Compliance Rule 12 imposes specific compliance like, Maintaining an Employee Stock Options register in Form No. SH.6 and shall enter the particulars of option granted under Section 62 (1) (b) of the Act Maintaining the above, the registered office of the company or such other place as the company’s BOD may decide. The entries in the register will be authenticated by the company’s CS or by any other individual authorized by the BOD for this reason. Other Duties Rule 12 also ensures some other specific measures and guidelines that the company should follow. Rule 12 Sub Rule 5: The company may modify or change specific ESOP terms by the way of a Special Resolution, provided such changes are fair to the employees. Rule 12 Sub Rule 6: This rule enables the company to provide at least one year between the grant of options and the vesting period. It also allows the company to fix a lock-in period. Additionally, it states that no employee will be allowed a right to vote or receive any dividend on the stock options until shares are issued on the exercise of the option. Rule 12 Sub Rule 7: This one speaks about the conditions in which the amount if any, paid by the employee can be refunded or forfeited. Rule 12 Sub Rule 8: Under Rule 8, the transferability of such options to any other person is restricted. But upon the employee’s death, the legal heirs and nominees can exercise the right. Rule 12 Sub Rule 9: It includes a few other aspects, in addition to the above-mentioned disclosures that have to be disclosed in the Director’s Report for the year by the BOD. We hope this article proved insightful in knowing the essential aspects of issuing ESOPs for listed and unlisted companies. As mentioned earlier, to know more and for comprehensive hand-holding.
Understanding ESOP Valuation: Why it is Crucial for Startups?
Understanding ESOP Valuation: Why it is Crucial for Startups? During tough times, a startup that has recently begun its journey can turn weak enough to start bleeding from various places. The human resource department is one such critical area. In situations like these, many startups consider ESOPs as a substantial option to hold their high-performing employees back. Offering ESOPs involves awarding stock options to employees based on their performance. They help retain employees to a certain extent. However, it is crucial for startups to evaluate them regularly and for various purposes, one of which is compliance. Let’s look at a few aspects related to it. What are ESOPs in India? At the outset, let’s understand the concept of ESOPs in India. Employee Stock Option Plan, also termed ESOP, is an incentive given to employees of a particular company to buy or subscribe to its shares at a predetermined price for the future. In other words, ESOP is a plan, wherein the company awards stock options to employees based on their performance. An employee stock option is termed a call option. It refers to employees having the right but not the obligation to buy the company’s shares on a pre-decided future date at a pre-decided price. ESOPs aim to encourage employees to perform better and enhance the company’s shareholders’ value. It offers monetary gains to employees and creates a sense of ownership, increased responsibility, and belongingness among employees. Now, let’s see why ESOP valuation is necessary for startups. Why is ESOP Valuation Necessary? According to the Indian Income Tax Law, only a SEBI Registered (Cat-I) Merchant Banker can do ESOP/ Sweat Equity valuation to determine the prerequisite tax payable that is in the control of the company’s employees and decision-makers. Now, let’s answer why ESOP valuation is important for startups. For a startup, ESOP valuation is crucial as the valuation of the organization in its entirety. Companies that offer ESOPs are required to provide ESOPs as an expense in their P&L statement. The provision impacts the determination of distributable profits for factors such as EPS calculation, dividend declaration, MAT payment, and profit determination for senior management remuneration. Hence, startups must expense ESOPs appropriately in the P&L statement. As per Ind-AS, companies must undertake a fair ESOP valuation while quantifying the ESOP expense. The compensation expenses reduce the startup’s EPS. On the other hand, employees paying excess tax may fade out the purpose and the value of the ESOP scheme. So, startups must plan ESOPs carefully and have them evaluated regularly to ensure the ESOPs serve their purpose and prove mutually beneficial. ESOP enables prospective shareholders to gain minority stakes. In that case, it is necessary to evaluate ESOP by applying minority valuation methods. If you consider a particular control methodology, you must provide appropriate discounts, the basis of observation and experience-based evidence, and case-related facts. ESOP Valuation with Valuation India Valuation India is an authorized startup ESOP valuation company headquartered in Pune. The company works with various startups across diverse business domains and employs the most appropriate ESOP valuation techniques. Connect with Valuation India at +918530064848 or write to info@valuationindia.co.in.
Need of Tax Consultant for Tax Planning
Need of Tax Consultant for Tax Planning Tax forms a significant part of every company’s compliance. However, it is an intricate aspect that demands meticulous planning, a careful study of tax structures, filing returns, and performing many other tasks. Honestly, you need an expert, precisely, a tax consultant to plan and manage taxes efficiently. Some may argue, we have accountants to do it. Of course, you do! However, won’t it be overwhelming for an already busy accountant to manage the challenging task of tax planning? Yes. Certainly. Hence, you require a tax consultant for efficient tax planning. But how does a tax consultant help plan tax efficiently? What is Tax Planning? Tax planning involves identifying and using tax exemptions appropriately and optimally, reducing tax liabilities, and managing tax rebates, while ensuring compliance with tax laws, rules, and regulations. It also refers to planning the tax aspect in advance, rather than rushing at the last moment and paying penalties. Tax planning is mainly of three types – short and long-range tax planning, permissive tax planning, and purposive tax planning. It aims to foster productive investments, economic growth and minimize litigation. How does Hiring a Tax Consultant Help? Tax is a complicated aspect to manage. It comprises compliance, failure in adhering to which can result in heavy penalties and loss of reputation. Accordingly, tax planning requires tax experts that do the below. Stay Cognizant About Tax Deductions A tax consultant can identify potential tax deductions and advise business owners on strategic investments that lower the tax liability. Additionally, the consultant can recommend legitimate methods to save taxes and diversify your tax portfolio. A consulting fee can help you legitimately save millions in taxes and penalties. Provide Appropriate Tax Advice Tax is an evolving dimension of business that requires professionals with updated tax knowledge. Tax consultants play a vital role here. They are well-versed and updated about a concerned country’s tax rules and regulations and provide appropriate tax advice to help their clients remain compliant. Save Time and Energy An accountant is considered the busiest person in an organization. Given the situation, assigning something as crucial as tax planning to an accountant may lead to mistakes and result in fines and non-compliance. Let alone the time required to complete the task. Hiring a tax consultant can save time and energy incurred in managing the intricacies of tax planning.
Export Incentive Schemes
Export Incentive Schemes What is SCIPS Exim/Duty Credit scrips are scrips given to exporters as “incentives” by the Government of India. While Merchandise Exports from India Scheme (MEIS) scrips are given for goods exports, Service Exports from India Scheme (SEIS) scrips are given for services exports. The value of the scrips are a percentage of the Free On Board (FOB) value of goods/services exported and are freely transferable. The scrips can be used to offset customs duty while importing. Recently, the government has removed the GST chargeable on sale of these scrips. The GST chargeable on sale of Exim/Duty Credit scrips is now ZERO! Service providers of eligible services shall be entitled to duty credit scrip at notified rates on the net foreign exchange earned. Duty credit scrips can be used for the payment of custom duties, excise duties, GST on procurement of services, custom duty in case of default in fulfilment of export obligation under Advance Authorization/EPCG, etc., Further, the SEIS scheme has given relaxation to the actual user condition and duty credit scrips and goods imported using duty credit scrips are freely transferable. Duty credit scrip would be valid for a period of 18 months from the date of issue. Their Objective & History the Objective to this Incentive scheme is to reward the Exporter to offset the Exporters Infrastructure inefficiencies and other costs that the exporters face while exporting from India, this Whole is stated Under Chapter 3 of Foreign Trade Policy (FTP) there are Schemes which provide benefits to exporters of certain goods or services. Service Exports from India Scheme is one of the two schemes under Foreign Trade Policy that were launched as a part of the Export from India Scheme. The prime motto of this scheme is to encourage export of notified services from India. Two schemes have been introduced under the Indian Foreign Trade Policy 2015-20 (FTP 2015-20) as a part of Exports from India Scheme. These schemes are namely: Service Exports from India Scheme (SEIS) Merchandise Exports from India Scheme (MEIS) Encouraging the export of notified services from India is the main objective of the Service Exports from India Scheme (SEIS). The details of the Service Exports from India Scheme (SEIS) are discussed below Merchandise Exports from India Scheme (MEIS) Merchandise Exports from India Scheme is popularly known as MEIS. MEIS is a duty scrip given as a reward by the government to an exporter of goods. The value of the scrips is 2% to 5% of the FOB value of goods exported. There are more than 5000 tariff lines which are eligible for MEIS. The scrips can be used to offset import duties and are freely transferable. (Note: The DGFT notifies the goods eligible for MEIS from time to time) Service Exports from India Scheme (SEIS) Services Exports from India Scheme is popularly known as SEIS. SEIS scheme was introduced on 1st April 2015 under the Foreign Trade Policy of India 2015-2020.SEIS aims to promote export of services from India by providing duty scrip credit for eligible exports The SEIS is a duty scrip given as a reward by the government to an exporter of services. The value of the scrips is 3% to 5% of the value of services exported. The scrips can be used to offset import duties and are freely transferable. Starting FTP 2-15-2020, service providers located in India are also eligible for benefits under the scheme. Service Exports from India Scheme was earlier termed as Served from India Scheme (SFIS). (Note: The DGFT notifies the services eligible for SEIS from time to time) SEIS Scheme Eligibility Services Eligible: Only Services rendered in Mode I: Cross Border Trade i.e. Supply of a service from India to any other country and Mode II: Consumption abroad i.e. Supply of a service from India to service consumers of any other country. Services not Eligible: Supply of a Service through Mode 3: Commercial Presence i.e. Supply of a service from India through Commercial Presence in any other Country and Mode 4: Presence of Natural persons in any other country – not eligible for reward under this scheme. To be eligible under this Scheme, the service provider shall have minimum net free foreign exchange earnings of $15,000 in the preceding financial year. For Individual Service Providers and Sole Proprietorships, such minimum net free foreign exchange earnings criteria is $10,000 in the preceding financial year. To claim the incentives, the service provider is required to have an active IEC Codeat the time of rendering such services. In case the IEC holder is manufacturer of goods as well as service provider, then the foreign exchange earnings and Total Expenses/ payment/ remittances to be taken into account for service provider only Also, in order to claim reward under the SEIS scheme, the service provider shall have to have an active Import Export Code (IE Code) at the time of rendering such services for which rewards are claimed. Net foreign exchange earnings for the SEIS scheme is calculated as: Net Foreign Exchange = Gross Earnings of Foreign Exchange – Total Expenses or payment or remittances of Foreign Exchange. Or Particulars Amount Gross Earnings of Foreign Exchange – Less: Total Expenses/Payments – Less: IEC holder’s Remittances of Foreign Exchange, with respect to the service sector in that particular financial year – Net Foreign Exchange – If the IEC holder is a manufacturer of goods as well as service provider, then the foreign exchange earnings and Total expenses / payment / remittances shall be taken into account for service sector only. In order to claim reward under the scheme, Service provider shall have to have an active IEC at the time of rendering such services for which rewards are claimed. What is the validity of MEIS or SEIS scrips? MEIS and SEIS scrips are valid for a period of 18 months from the date of issuance of the scrips. The limited validity of scrips means delays in realizing its value could mean loss of complete value of the license. [No half measures here!] My MEIS/SEIS scrips have
4 Steps for NRIs on How to File Income Tax in India
NRIs are required to pay tax on income earned, accrued, arisen, or deemed to be accrued or arisen in India. This article will look at the four steps involved in filing income tax for NRIs in India. How to File Income Tax for NRIs in India | 4 Step NRI Income-Tax Filing Process Determine the NRI’s Residential’s Status At the outset, you must determine the residential status concerning the financial year. It is done through u/s 6 of the Income Tax Act 1961. However, an NRI must stay abroad for 182 days or more. If not, the person is considered a resident. Calculate the Taxable Income Next, calculate the taxable income. To do so, you must calculate the total gross income. Gross income is the total income before tax deductions. NRIs must pay taxes if their gross income before tax deductions is above INR 2.5 lakh. Income earned through salary, mutual funds, shares, NRO deposit interest, etc., is considered part of the gross income. Nevertheless, NRIs can claim benefits under tax treaties. They can claim refunds for TDS deductions. But to do so, NRIs have to reconcile TDS credit and advance tax as it reflects in Form 26AS. In both cases, it is imperative to file returns. Here the gross income is not relevant. NRIs can claim a deduction of up to IN 1.5 lakh u/s 80c of the Income Tax Act. If an NRI’s income is above INR 50 lakh, they must report their assets and liabilities in India. Claim the Double Taxation Treaty Advantage Double Tax Avoidance Agreement (DTAA) helps NRIs avoid paying tax twice on the same income. It comprises tax exemption from a tax deduction in a specific country or taxed at a lower rate in the NRI’s home country. If an NRI has already paid tax in India, they can get a tax credit in their country of residence on the tax paid on the same income. ITR Verification The last step is to verify the filed ITR within 120 days. Failure to do so turns the ITR invalid. File ITR Returns with ANGCA Are you an NRI looking forward to filing an ITR return? Connect with ANGCA. The firm is a team of experienced tax professionals and consultants that ensure comprehensive hand holding while filing ITR returns. To know more, write to ang@angca.com or call +91-7722063311.
Deadline for filing Income Tax returns, Pan-Aadhaar linking final date was extended to March 2022
After the March 2022 deadline for filing Income Tax returns, Pan-Aadhaar linking final date was extended to March 2022 The central government has extended the deadlines for PAN-Aadhaar link extension as a significant relief to those affected by the covid 19 pandemic. It increased the last date for filing income tax, but this was not enough. “In light of the hardships faced by taxpayers, we have extended certain timelines,” stated the Central Board of Direct Taxes in a statement late Friday. The deadline for linking PAN and biometric ID Aadhaar was extended six months to March 2022. The deadline was set earlier, on September 30, 2021. It stated that the time limit for intimation by Aadhaar number at the Income tax Department to link PAN and Aadhaar was extended from 30 September 2021 to 31 March 2022. The I-T Act penalty proceedings have been extended to September 30, 2021, and March 31, 2022. The Adjudicating Authority has extended the deadline for notifying and issuing an order under the Prohibition of Benami Property Transactions Act 1988 to March 2022. In view of the coronavirus pandemic, technical issues with the new IT website, and the extension of the deadline to file Income Tax returns until December 31, the government extended the deadline on September 9th.
What is New in Form 26AS and How it Impacts Taxpayers
What is New in Form 26AS and How it Impacts Taxpayers? The Central Board of Direct Taxes (CBDT) recently ordered the incorporation of various new financial details in Form 26AS under the Income Tax Act 1961. The new details include purchases like mutual funds, foreign remittances, etc. Of course, there’s much more to the new details to be entered. While we enlist the new details to be incorporated, we also look at what it means for taxpayers, or in other words, how will it impact taxpayers? Form 26AS, as we all know, is a consolidated annual tax statement that comprises tax-related information of a particular taxpayer. Earlier, the form used to reflect the tax collected at source, TDS, high-value transaction information, advanced tax payment, refunds, etc. However, the list of details has now turned longer. The new amendments include, Foreign remittance details Information of other taxpayers in the ITR Off-market transactions reported by Depository/Registrar and Transfer Agent (RTA) Details concerning mutual fund purchases and dividends received Salary breakup of various components to be reported by the employers Interest on refunds of the previous year For taxpayers, the inclusion of foreign remittance details refers to being cautious about compliance concerning the Income Tax Act and Foreign Exchange Management Act (FEMA). As per previous amendments, details like foreign remittances and mutual fund purchases above a particular limit were to be captured if they went beyond a specific limit. How will the New Changes Impact Taxpayers? What do these changes mean for taxpayers, or what impact will the new Form 26AS amendments have on taxpayers? Well, these changes are good for taxpayers. That’s because they can now check the details of the Statement of Specified Financial Transactions reported by various entities. Besides, the SFTs will help taxpayers recall the financial transactions and file ITR accordingly. Further, extending the scope of Form 26AS will simplify ITR filing as taxpayers can fetch a higher number of details through a single statement. Additionally, the new Form 26AS will also include details of outstanding demands. It will help taxpayers check if a particular demand is really outstanding or disputed. In the case of the latter, the tax can rectify the mistake or file an application for condonation of delay if the due date has already passed. The more comprehensive nature of Form 26AS refers to no extra burden for taxpayers who have disclosed all the required details. Need assistance on Form 26AS? Talk to ANGCA’s tax consultants and experts at +91 77220 63311.
Method for Startup Valuation
VALUATION FOR STARTUPS Young and Start-Up Companies usually are small, they represent only a small part of the overall economy however they tend to have a disproportionately large impact on the economy for several reasons like Employment, Economic Growth, Innovation, Increased flow of foreign money, Decrease of Imports, Increase of Exports, etc. Valuing companies early in the life cycle is difficult, partly because of the absence of operating history and partly because most young firms do not make it through these early stages to success. The valuation process hold importance for startups and entrepreneurs as it helps determine the fair amount of equity they have to give to an investor in exchange of funds . Also the process holds the same importance for investors as they need to know what percentage of shares they will receive in return for the amount they have invested. The most fascinating interrogation comes forth is that with all such characteristics of startup companies; Is it really possible to value them? Even though startups are notoriously hard to value accurately there are some approaches used to determine the company’s worth. 1.Cost-to-Duplicate Method- This approach involves calculating how much it would cost to build another company just like it from scratch. It often looks at the physical assets to determine their fair market value. The cost-to-duplicate approach is often seen as a starting point for valuing startups since it is fairly objective. For a high-technology startup, it could be the costs to date of research and development, patent protection, and prototype development. This method requires extensive research, but it offers one of the most realistic valuation methods because it takes everything into consideration, from the initial idea to labor to relationship-building. The big problem with this approach and company founders will certainly agree here is that it doesn’t reflect the company’s future potential for generating sales, profits, and return on investment. It doesn’t capture intangible assets, like brand value, that the venture might possess even at an early stage of development. 2.Market Multiple – The Market Multiple Approach is one of the most popular startup valuation methods. The market multiple method works like most multiples do. Venture Capital investors like this approach, as it gives them a pretty good indication of what the market is willing to pay for a company. Basically, the market multiple approach values the company against recent acquisitions of similar companies in the market. Let’s say mobile application software firms are selling for five times sales. Knowing what real investors are willing to pay for mobile software, you could use five-times multiple as the basis for valuing your mobile apps venture while adjusting the multiple up or down to factor for different characteristics. If your mobile software company, say, were at an earlier stage of development than other comparable businesses, it would probably fetch a lower multiple than five, given that investors are taking on more risk. Unfortunately, there is a hitch: Comparable market transactions can be very hard to find. It’s not always easy to find companies that are close comparisons, especially in the startup market. Deal terms are often kept under wraps by early-stage, unlisted companies the ones that probably represent the closest comparisons. 3.Discounted Cash Flow (DCF) – This valuation method applies to startups that are generating cash flows, and there is a certainty of cash flows in future. Discounted cash flow analysis then represents an important valuation approach. DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. We begin with the fundamental notion that the discount rate used on a cash flow should reflect its riskiness, with higher-risk cash flows having higher discount rates. A higher discount rate is typically applied to startups, as there is a high risk that the company will inevitably fail to generate sustainable cash flows. Then the future free cash flows are estimated and discounted to the present value. And if the value obtained from this method is greater than the cost of investment, the investment opportunity is a positive one. The problem with the DCF method is that it depends on an analyst’s ability to accurately predict future market conditions. The analyst then must make reasonable assumptions about long-term growth rates. 4.The Berkus Method (Valuation by Stage)- The Berkus Method was created by venture capitalist Dave Berkus to find valuations specifically for pre-revenue startups, i.e., businesses not yet selling their products at scale. The idea is to assign dollar amounts to five key success metrics found in early-stage startups. The Berkus Method works by assessing how your startup will perform in the five key criteria by assigning a number, a financial valuation, to each criterion. Finally, this is the development stage valuation approach, often used by angel investors and venture capital firms to quickly come up with a rough-and-ready range of company value. Although it doesn’t take other market factors into account, the limited scope is useful for businesses looking for an uncomplicated tool. With the Berkus Method, the only financial projection you’ll need to make is the potential of your startup to generate over $20 million in revenues by your fifth year in business. Once a company is generating cash, this method is no longer applicable. 5.Scorecard Valuation Method- The Scorecard Method is another option for pre-revenue businesses. It also works by comparing your startup to others that are already funded but with added criteria. First, you find the average pre-money valuation of comparable companies. Then, you’ll consider how your business stacks up according to the following qualities. Strength of the team: 0-30% Size of the opportunity: 0-25% Product or service: 0-15% Competitive environment: 0-10% Marketing, sales channels, and partnerships: 0-10% Need for additional investment: 0-5% Other: 0-5% A venture capitalist firm would assign weights to each of these factors and compare them to competitors. You’d get the factors for each category by multiplying the weight for each category by the startup’s relative position. You’ll then assign each quality a comparison percentage. Essentially, you can be on par (100%), below average (<100%), or above average