The founder’s guide to the valuation conversation

At some point, someone will put a number on your company — an investor, an auditor, a lawyer setting up a share option scheme. The number can feel arbitrary, especially when two credible people produce two different ones. It is less mysterious than it looks. Valuation has a grammar, and knowing it changes the conversation from “is this number right?” to a much more useful question: “what question is this number answering?”

Every valuation answers a specific question

The starting point in the International Valuation Standards (IVS) — a framework used in more than 100 countries — is something called the basis of value: value to whom, for what purpose, under what assumptions. IVS 102 Bases of Value exists because the same company can carry several defensible values at the same time. A figure prepared for a tax filing answers a different question from one negotiated in a funding round, which is different again from the value a fund reports to its own investors. The first useful question about any number is what basis it was prepared on. Disagreements about valuation are often disagreements about purpose in disguise.

Three ways to reach a number

IVS 103 Valuation Approaches groups methods into three families. The market approach looks at what comparable businesses, or stakes in them, have changed hands for. The income approach asks what the cash the business may generate in future is worth today. The cost approach asks what it would take to recreate the assets. None of them is “the right one”. Valuers select and weight approaches based on the company and the evidence available — and early-stage businesses, with short histories and few close comparables, are simply the hard cases. That is why judgement, rather than formula, does most of the work in startup valuation, and why the assumptions behind a number matter more than the arithmetic on top of them.

Why your investors’ number moves between rounds

If a fund invests in your company, it must report the value of that holding to its own investors at each reporting date — typically at fair value as defined by accounting standards, applied using the IPEV Valuation Guidelines, the industry guidance for private equity and venture capital, anchored in fair value under IFRS 13 and ASC 820. That reported value is an estimate at a date. It can move when market conditions move, even if nothing has changed inside your business. It is not an offer, not a price, and not a verdict on your prospects — it is the fund doing its own reporting job.

A range is normal

The IVSC’s paper on managing and communicating value uncertainty makes a point founders may find reassuring: uncertainty is inherent in valuation, not a sign that someone got it wrong, and even a valuation fully compliant with the standards may support a range of credible outcomes. Two careful professionals can value the same company and land in different places without either being careless. What separates a good valuation from a weak one is not false precision — it is whether the assumptions are explicit, the reasoning is traceable, and the uncertainty is acknowledged rather than hidden.

Questions worth asking

You do not need to become a valuer to hold your end of the conversation. A few questions go a long way. What basis of value was this prepared on, and for what purpose? Which approaches were used, and why those? What are the key assumptions, and which of them would move the number most if they changed? How was the wider environment reflected, and at what date? None of this is confrontational; any professional working to recognised standards will have ready answers, because the standards require the reasoning to be documented. A valuation you can interrogate is worth more to you than one you simply accept — whatever it says.