Startup valuation glossary

Term used for the ESS start-up concession's turnover condition: the combined turnover of the employer and its group companies for the most recent income year before the year an ESS interest is acquired must not exceed $50 million ¹. It is a group figure, not just the employer company's own revenue, and certain venture capital and DGR-endorsed entities are disregarded when it is tested ¹. See ESS and ESOP valuations.

Once a company has more than one class of shares, the exercise of dividing total equity value between them, because preference rights usually mean the classes are not worth the same amount per share. In our view, three techniques are commonly used in valuation practice: a waterfall at one assumed exit value, probability-weighted exit scenarios, or an option pricing approach; no Australian standard mandates any one of them, other than the ESS start-up concession's own Method Two formula for that purpose only ². See Ordinary vs preference shares.

A term that protects an investor's effective price per share if the company later issues shares at a lower price, usually by adjusting the conversion ratio of that investor's preference shares. In our view, it is one of the rights that can shift value toward a protected class in a down round, without any cash changing hands. See Ordinary vs preference shares.

Annual recurring revenue (ARR) and monthly recurring revenue (MRR) describe subscription or contracted revenue a company expects to keep receiving, as distinct from one-off or trial income. Where a company has them, we ask for a split between recurring and one-off revenue, because in our view recurring, contracted revenue supports a forecast with more confidence than one-off income does. See the startup valuation readiness checklist.

A departing founder or shareholder classified, under the shareholders' agreement, as leaving on terms that price their shares less favourably than a good leaver would receive. Judgement: agreements vary widely in how a bad leaver's shares are priced, from the same basis as a good leaver to a reduced formula price, so the clause has to be read rather than assumed. See Founder and shareholder share transfers.

The standard a valuation is measured against, for example the market value of an ordinary share for the ESS start-up concession test ¹, market value in its ordinary meaning for most other tax events ³, or whatever a shareholders' agreement defines for a transfer. Different bases can produce different figures for the same company on the same day, which is why every engagement states which one applies before any method is chosen. See How to value a startup.

How much cash a company spends, net of income, each month. Together with the cash balance at the valuation date, it sets the runway, and in our view a company burning cash faster than its runway supports is a risk factor a valuation has to weigh, not only a bridge item. See Valuing a start-up before it has revenue.

The register of everyone with a claim on a company's shares: every class of share on issue, options and rights granted, the unallocated option pool, and any SAFEs, convertible notes or warrants, usually shown before and after a transaction so the effect on each holder is visible. See Pre-money vs post-money.

A condition attached to both LI 2025/19 safe harbour methods: neither method is approved for the ESS start-up concession test unless the directors reasonably anticipate there will not be a change of control within the 6 months after the valuation time ². In our view, this is one of the conditions most likely to catch a company out, because it is tested again at each grant date, not only once. See How ESS valuations work.

A loan to the company that converts into shares if specified conditions are met, commonly a future priced round or a maturity date, and that carries interest and a repayment obligation until it converts or is repaid. Unlike a SAFE, a convertible note is legal debt from the day it is issued. See SAFEs and convertible notes.

For an ESS interest taxed outside the start-up concession, the point at which the discount is included in assessable income: the earliest of no real risk of forfeiture and no remaining sale restriction, exercise of a right on the same basis, or 15 years after acquisition ⁴. Cessation of employment is no longer a deferred taxing point for employment ceasing on or after 1 July 2022 ⁴. See How ESS valuations work.

The reduction in each existing holder's percentage of the company caused by new shares being issued, whether through a priced round, an option pool top-up, or a SAFE or note converting. A cap table showing only the latest round can hide dilution from an earlier pool top-up or a still unconverted instrument. See Pre-money vs post-money.

A SAFE or convertible note term that lets the instrument convert at a stated reduction to the price per share paid by new investors in a later priced round, rather than at that round's own price. Where a SAFE carries both a discount and a valuation cap, the document itself states which applies, commonly whichever produces the lower conversion price. See SAFEs and convertible notes.

A company's ESS reporting obligations under Division 392 of the Taxation Administration Act 1953. Where a value has been worked out under one of the LI 2025/19 safe harbour methods, that same value may also be used for this reporting ⁵. See How ESS valuations work.

The value of a company's underlying operating business, before surplus cash, debt and debt-like items are added or deducted, and before any allocation across share classes. It is one input on the way to a per-share figure, not itself a share value. See How to value a startup.

The step that moves from enterprise value to equity value: adding surplus cash and deducting debt and debt-like items, including a judgement call on whether each unconverted SAFE or convertible note is treated as a debt-like item or as already converted into shares. In our view, cash runway is relevant to this step only to the extent cash is surplus to the company's plan, since the same balance is also a separate risk indicator in its own right. See How to value a startup.

Enterprise value plus surplus cash, less debt and debt-like items, including a judgement call on whether each unconverted SAFE or convertible note is treated as debt or as converted. Total equity value is the figure allocated across a company's share classes where more than one exists. See How to value a startup.

The Australian term for an arrangement providing shares, options or rights to employees in connection with their employment. Division 83A of the Income Tax Assessment Act 1997 taxes the resulting discount, and the Corporations Act's Part 7.12 sets disclosure requirements for ESS offers by unlisted companies ^{1 6}. See ESS and ESOP valuations.

A share, option or right provided to an employee under an employee share scheme. Outside the start-up concession, its market value is the taxing basis: a share at its market value, and an unlisted right that must be exercised within 15 years at either its market value or a value worked out under the regulations, at the employee's choice ^{7 8}. See How ESS valuations work.

Supporting information an unlisted company must give for certain ESS offers under section 1100X(3) of the Corporations Act 2001, which can be a valuation of the ESS interest prepared consistently with an approved tax method, a same class disclosure document, or an arm's length agreement for the same class of interest, among other options ⁶. A preference share round agreement does not serve as this document for an ordinary share or option offer, because it covers a different class ⁶. See How ESS valuations work.

The value used under accounting standard AASB 13 for financial reporting. The ATO treats this as a different concept from market value for tax purposes, so a fair value figure prepared for the accounts is not automatically the market value an ESS grant or a tax event needs ³. See Startup valuation.

A share count that includes every share on issue of every class, plus every option and right granted, the unallocated option pool, and any SAFE or convertible note counted as if already converted, so a percentage is calculated against the same, complete base. Judgement: each term sheet defines its own list of what "fully diluted" includes, so the same headline pre-money figure can price shares differently depending on which items are counted. See Pre-money vs post-money.

A departing founder or shareholder classified, under the shareholders' agreement, as leaving on terms that avoid a leaver discount. Judgement: exactly which circumstances qualify, and what price applies, depends entirely on how the individual agreement is drafted, and there is no standard definition, though death, incapacity, redundancy and a board-agreed resignation are commonly included. See Founder and shareholder share transfers.

Inserting a new company above an existing trading entity, so its shareholders exchange their shares for shares in the new top company, commonly done ahead of a capital raise so investors subscribe into the new entity rather than the operating business directly. In our view, this step usually needs its own tax advice, because it can trigger a tax event depending on how it is structured. See Tax and restructure valuations.

A right that pays a preference shareholder a set amount, commonly a stated multiple of the amount invested, before ordinary shareholders are paid anything on a sale, wind-up or other liquidity event. It is usually structured as non-participating (the holder takes the preference or converts to ordinary, whichever is worth more) or participating (the holder takes both). See Ordinary vs preference shares.

For tax purposes, market value takes its ordinary meaning unless a provision defines it differently: the price a hypothetical willing but not anxious buyer and seller would agree, at arm's length, at the valuation date, with no special value to a particular buyer ³. For the ESS start-up concession, the relevant test is the market value of an ordinary share at the time the interest is provided ¹. See Startup valuation.

The rule in section 116-30 of the Income Tax Assessment Act 1997 that can replace the capital proceeds from a CGT event with the asset's market value: where no capital proceeds are received, where the proceeds cannot be valued, or where the proceeds differ from market value and the parties did not deal with each other at arm's length, subject to specified exceptions ⁹. In our view, this is one reason to have defensible market value evidence ready even where a rollover is otherwise expected to apply to a restructure. See Tax and restructure valuations.

The value of a company's tangible assets less its liabilities. Under Method Two of the ESS start-up concession safe harbour, net tangible assets, disregarding preference shares, less the amount needed to discharge preference share obligations, are divided by the ordinary shares plus any preference shares that participate in residual assets on a winding-up ². See Valuing a start-up before it has revenue.

Shares set aside, usually unallocated at the time of a round, for future grants to employees and advisers under a company's employee share scheme. Whether a pool created or topped up sits inside the pre-money number, diluting existing shareholders, or on top of the post-money number, diluting everyone including the new investor, depends on the term sheet's own definition. See Capital raise valuations.

The class of share founders and employees usually hold, ranking behind preference shares in a sale, wind-up or other liquidity event where a preference stack exists. The ESS start-up concession's market value test is specifically the market value of an ordinary share, not the price of any preference class on issue ¹. See Ordinary vs preference shares.

A specific shareholder's specific holding within a class, for example a founder's post-vesting shares, as distinct from the value of the whole class or the whole company. A parcel's value can also depend on whether it is a controlling or minority interest and on any transfer restriction in the constitution. See Founder and shareholder share transfers.

A right that lets a preference share share in exit proceeds left over after its stated preference is paid, alongside ordinary shares, rather than choosing between the preference and converting. In our view, this reduces what is left for ordinary shareholders even after the stated preference amount has already been satisfied. See Ordinary vs preference shares.

Pre-money valuation plus the new money actually invested in a round. The same price per share prices both figures; only the share count changes between them. See Pre-money vs post-money.

The round price per share multiplied by the fully diluted share count just before the new investor's shares are added. It is a negotiated figure implied by the round price, not a valuation of the business or of any one class of share on its own. See Pre-money vs post-money.

A share class carrying rights ordinary shares do not have, commonly a liquidation preference, participation, a conversion mechanism, anti-dilution protection and a dividend entitlement, usually issued to investors in a priced round. Because of these rights, total equity value does not divide evenly between preference and ordinary shares. See Ordinary vs preference shares.

An arrangement where a founder's shares are issued up front but remain subject to a vesting schedule, so unvested shares are bought back, usually for a nominal price, and cancelled if the founder leaves before they vest. Judgement: exactly how unvested shares are dealt with on a departure depends on the shareholders' agreement, not a general rule. See Founder and shareholder share transfers.

How long a company can operate on its current cash balance and burn rate before it needs more capital or revenue. In our view, a longer runway generally lowers the risk of a forced or down round, and surplus cash is also an input to the bridge from enterprise value to equity value. See Valuing a start-up before it has revenue.

An agreement under which an investor pays the company money now for the right to receive shares later, typically at the company's next priced round, at a price set by a valuation cap, a discount, or both. It is usually not drafted as a loan, and usually carries no interest and no maturity date. See SAFEs and convertible notes.

Two methods in Legislative Instrument LI 2025/19 for working out the market value of an unlisted ordinary share for the ESS start-up concession test ^{10 2}, available only where the company provides an ESS interest at that time and directors reasonably anticipate no change of control within the following 6 months ². Method One is a comprehensive valuation by the CFO or a suitable valuer, taking four prescribed matters into account and endorsed by a directors' resolution; Method Two is a net tangible assets formula, available only where further conditions on recent capital raised, company age and financial reporting are also met ². Where the conditions are met, the resulting value binds the Commissioner, but only for that specific test ^{2 5}. See How ESS valuations work.

A preference class created for a SAFE or convertible note when it converts, commonly on the same terms as the class issued to new investors in that round, so the converting instrument and the new round's investors end up in a similarly ranked class. Which class a specific instrument converts into is set by its own document. See SAFEs and convertible notes.

A category of shares carrying its own set of rights, for example ordinary shares or a named series of preference shares. A company can carry several classes layered on top of each other from successive rounds, each on its own negotiated terms, and no two companies' class rights are necessarily the same. See Ordinary vs preference shares.

Broadly, an entity carrying on a business is a small business entity for an income year if it also carried on a business in the previous year with aggregated turnover under $10 million, or if its aggregated turnover for the current year is likely to be under $10 million, subject to exceptions (for example, the "likely to be" limb is not available after two previous years at $10 million or more) ¹¹. This general turnover test is a different test from the ESS start-up concession's own $50 million aggregated turnover condition (see Aggregated turnover, above), and uses a different threshold. It also serves as an alternative to the age test for LI 2025/19 Method Two eligibility: a company satisfies that limb of Method Two either by being incorporated 7 years or less, or by being a small business entity under this test ². See How ESS valuations work.

The ESS provisions in section 83A-33 of the Income Tax Assessment Act 1997 that, where conditions on listing, company age, group turnover, residency, market value and minimum holding are all met, reduce the taxable discount on an ESS interest to nil at acquisition ^{12 1}. It is a timing and quantum benefit, not an exemption: gains or losses on disposal are still assessed under capital gains tax ^{12 4}. See ESS and ESOP valuations.

The document recording the price, class, amount and rights agreed for a round, including its own definition of what a "fully diluted" share count includes for that round. Two term sheets quoting the same headline pre-money figure can still price existing shares differently if their fully diluted definitions differ. See Pre-money vs post-money.

What is actually being valued: the whole company (enterprise value or total equity value), one class of shares, a specific parcel, or an option or right. A percentage of the company is not automatically the same percentage of its value once class rights and dilution are taken into account. See How to value a startup.

A ceiling on the price used to work out how many shares a SAFE converts into. If the company's next priced round values it above the cap, the SAFE still converts as though the company were valued at the cap, so the SAFE holder receives more shares for the same money than an investor buying in at the round's own price. See SAFEs and convertible notes.

A pricing tool investors use to size what they will pay for a round, working backward from an assumed future exit value and their required return. In our view, it is useful as a cross-check on the logic behind a round, not a market value conclusion of the kind a valuation report reaches. See How to value a startup.

Vesting is the schedule under which a founder's or employee's shares or options become unconditionally theirs over time. A cliff is an initial period, commonly the first year, before which none of the grant vests at all. Founder shareholdings are commonly subject to reverse vesting on the same kind of schedule. See Founder and shareholder share transfers.

A right to acquire shares at a stated price, usually granted to an investor, lender or service provider alongside another instrument, and counted in the fully diluted share count once granted. See Pre-money vs post-money.