Designated Partner in LLP: Role, Responsibilities, and Legal Requirements

What is the valuation of a company?

Company valuation is the process of determining a business's financial worth or fair value. It is not just about looking at profits or assets- it’s about considering both financial and non-financial factors that influence the company’s value.

For example:

• Financial factors include revenue, profit margins, debt levels, and cash flows.
• Non-financial factors include brand reputation, customer base, intellectual property, and market potential.

A valuation helps stakeholders, founders, investors, lenders, or acquirers understand the true worth of a company for purposes like fundraising, mergers & acquisitions, taxation, or stock market investing.

How to calculate company valuation?

There is no single method to calculate company valuation. Instead, there are three primary approaches commonly used:

1. Income Approach

• Focuses on the company’s future earnings potential.
• The most common method here is the Discounted Cash Flow (DCF) model.
• DCF estimates the present value of future cash flows, adjusted using the Weighted Average Cost of Capital (WACC).
• Useful for startups and growing companies where future cash flows are expected to be significant.

2. Asset Approach

• Focuses on the net value of the company’s assets after deducting liabilities.
• Often called the Net Asset Value (NAV) method.
• Formula: NAV = (Fair Value of Total Assets – Total Liabilities).
• Suitable for asset-heavy businesses like real estate, manufacturing, or holding companies.

3. Market Approach

• Values a company by comparing it with similar businesses in the market.
• Uses multiples such as:
  
  
  • Price-to-Earnings (P/E) Ratio
  • Price-to-Sales (P/S) Ratio
  • Price-to-Book Value (PBV) Ratio
    
    
• Helps determine whether a company’s stock is undervalued or overvalued compared to peers.

Key metric: EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) is often used in valuation since it reflects a company’s operating performance without non-cash and non-operating costs.

Company Valuation Formula

There is no one universal formula for valuation- different methods use different formulas. Here are some of the most widely used:

1. Asset Approach (Net Asset Value)

NAV = Fair Value of Assets - Total Liabilities

Example: If a company has assets worth ₹100 crore and liabilities worth ₹40 crore, its NAV = ₹60 crore.

2. Income Approach (Discounted Cash Flow)

Where, 

CFt = Cash flow in year t

W ACC = Weighted Average Cost of Capital

t = Time period

‍

This gives the present value of all future cash flows.

3. Market Approach Ratios

• P/E Ratio

• P/S Ratio

‍

• PBV Ratio

‍

These ratios are compared with industry averages to determine valuation.

Company Valuation Examples

Example 1: Discounted Cash Flow (DCF)

Suppose a company is expected to generate free cash flows of ₹10 crore annually for the next 5 years. The discount rate (WACC) is 10%.

= ₹37.9 crore (approx).

If the market cap of the company is ₹30 crore, the stock may be undervalued.

Example 2: Relative Valuation (P/E Ratio)

• Company A’s P/E ratio = 18x
• Company B’s P/E ratio = 12x
• Industry average P/E ratio = 15x

Here, Company A is trading above the industry average (possibly overvalued), while Company B is trading below (perhaps undervalued).

Importance of Calculating a Company’s Valuation

• For Investors: Helps identify whether a stock is overpriced or a good buying opportunity.
• For Founders: Essential during fundraising, mergers, acquisitions, or strategic exits.
• For Lenders: Determines the borrowing capacity and creditworthiness of a business.
• For Markets: Provides transparency and helps maintain fair pricing of securities.
• For Business Growth: Guides decision-making on expansions, investments, and restructuring.

Frequently Asked Questions (FAQs)

‍

What is Equity Dilution?

Equity dilution refers to the reduction in existing shareholders’ ownership percentage due to the issuance of new shares. Although it doesn't necessarily mean a loss in actual monetary value, it does mean reduced voting power, ownership stake, and potential control over the company.

For example, if a founder owns 50% of a company before a funding round and 40% after new shares are issued to investors, the 10% drop is equity dilution.

Causes of Equity Dilution in India

Several scenarios in India lead to equity dilution:

• Fundraising through equity: When a company raises capital by issuing new shares to investors (angel, VC, PE).
• ESOPs (Employee Stock Option Plans): Issuing shares to employees for retention and motivation.
• Convertible instruments: When convertible debentures or notes convert to equity.
• Mergers and acquisitions: New shares issued as part of a transaction.
• Bonus or rights issues: Depending on the structure, these can also dilute holdings if not proportionally subscribed.

Impact of Equity Dilution

Dilution can affect stakeholders in various ways:

• Founders: Loss of control or voting power if too much equity is given away early.
• Investors: Reduced ownership percentages, which may affect decision-making influence.
• Employees: If ESOPs are diluted too often, their potential upside gets reduced.
• Company valuation: Though dilution reduces percentage ownership, it can lead to growth and higher valuations, offsetting the effect in monetary terms.

How Does Share Dilution Happen?

Share dilution occurs when a company issues additional shares, reducing the ownership percentage of existing shareholders. While the total number of shares increases, each existing shareholder’s slice of the pie becomes smaller — unless they participate in the new issue.

Here are the most common ways share dilution happens in India:

1. Fundraising (Equity Rounds)

During seed, Series A, or later funding rounds, new investors are issued fresh equity. To accommodate them, the company increases its authorised and paid-up share capital, diluting the percentage held by existing shareholders.

Example:
A founder owns 100% of a startup with 1,00,000 shares. After raising funds from investors who are issuing 50,000 new shares, the founder’s ownership drops to 66.67%.

2. Issuing ESOPs (Employee Stock Option Plans)

Startups often set aside 5–15% of their cap table for ESOPs to attract and retain top talent. These options, once vested and exercised, convert into shares — reducing the percentage stake of other shareholders.

3. Conversion of Convertible Instruments

Instruments like convertible notes, SAFE (Simple Agreement for Future Equity), or CCDs (Compulsorily Convertible Debentures) convert into equity at a future date. When they convert, new shares are issued, which dilute existing ownership.

4. Mergers or Acquisitions

In some mergers or acquisitions, equity may be offered as part of the consideration to the merging entity or its shareholders. This leads to the issuance of new shares and causes dilution.

5. Bonus Shares to Select Stakeholders

Occasionally, a company might issue bonus shares to certain shareholders or employees as incentives, which can result in uneven dilution.

Reasons for Equity Dilution

• Capital infusion: To fund growth, R&D, hiring, marketing, etc.
• Strategic partnerships: Issuing equity to partners or advisors.
• Debt conversion: Debt turning into equity through convertible notes.
• Regulatory compliance: SEBI regulations may require public companies to maintain a certain free float, triggering new issuance.

Managing Equity Dilution in India

Equity dilution is inevitable as your startup grows — but managing it smartly can protect both your control and long-term value. Indian founders must understand the tools, strategies, and legal frameworks available to reduce unnecessary dilution and align all stakeholders.

1. Plan Your Cap Table Early

Create a 5–7 year cap table projection. Visualise future funding rounds, ESOP pools, convertible instruments, and expected dilution at each stage.

2. Raise What You Need, Not What You Can

Avoid over-raising in early rounds. Each round of funding comes at the cost of equity. Only raise what’s required to hit the next set of milestones.

3. Negotiate Better Valuations

Valuation is key to how much equity you give up. Strengthen your fundamentals, traction, and pitch to negotiate higher valuations, thus minimising dilution per rupee raised.

4. Use Convertible Instruments Strategically

Instruments like SAFE notes or CCDs can delay dilution until a priced round. Use them in early or bridge rounds to preserve equity while bringing in capital.

5. Be Thoughtful with ESOP Allocation

ESOPs are critical to building a strong team, but don’t over-allocate too early. Start with a lean pool (5–10%) and expand as your team grows and funding allows.

6. Include Anti-Dilution Provisions (If You're an Investor or Co-Founder)

While often investor-friendly, certain anti-dilution clauses can protect your equity in down rounds. Founders should understand these clauses and negotiate fair terms.

7. Consider Non-Dilutive Capital

Explore grants, government schemes (like Startup India Seed Fund, MeitY TIDE, or NIDHI), or revenue-based financing. These options offer capital with no equity dilution.

8. Maintain Founder Alignment

If co-founders have significantly unequal stakes, align expectations early. Future dilution can compound tensions if not addressed at the start.

How Shareholders Can Handle Equity Dilution?

• Pre-emptive rights: Ensure agreements include rights to participate in future rounds to maintain shareholding.
• Anti-dilution clauses: Particularly for investors, these can protect them from value dilution in down rounds.
• Monitor ESOP pools: Oversized ESOP pools dilute all shareholders.
• Regular cap table reviews: Stay updated to avoid surprises in ownership shifts.

Conclusion

Equity dilution is a natural part of a growing business, especially in India's thriving startup and investment landscape. While it may seem negative on the surface, it often enables access to capital, talent, and partnerships that fuel long-term value creation. 

The key lies in understanding, planning, and strategically managing dilution to protect stakeholder interests while supporting the company’s growth.

‍

Eligibility

• Should be recognised by DPIIT.
• Startups should not have received more than Rs 10 lakh of monetary support under other significant government schemes.
• The Startup shall have been in existence for no more than two years at the time of application.
• Should be using technology as its core product or service to create innovative solutions in different sectors.
• Must have a business idea to develop the product with a scope of scaling
• According to the Companies Act of 2013 and the SEBI (ICDR) Regulations of 2018, Indian promoters must own at least 51 percent of the company at the time of application to the incubator.
• The seed support is generally available in grants and debt/convertible debentures.

Application procedure for Startups

The application procedure for availing the seed fund from the incubators by the startups under the StartUp India Seed Fund Scheme is as follows:

Startup India Registration

• Go to https://seedfund.startupindia.gov.in/.
• On the top right side of the homepage, click the 'Login' button, then the 'Create an Account' option at the bottom of the "Login" tab.
• The ‘Startup India’ registration page will open.
• After filling out the form, click the 'Register' button.
• An OTP will be sent. Enter the OTP and click the ‘Submit’ button.

Startup India Seed Fund Application

• Go to the website again and click on the ‘Apply Now’ button on the right-hand side of the homepage.
• Click on the ‘Apply Now’ button under the ‘For Startups’ option and log in using the username and password registered.
• The application form will open. Put in all the details, upload the documents, and click on the ‘Submit’ button.
• The application will be submitted for the selection of the startup.

Selection of Startups for the Scheme

The Eligible Incubator will select startups for this scheme based on the following criteria:

• Idea
• Feasibility
• Novelty
• Fund Utilization Plan
• Business Plan
• Presentation
• Potential Impact

Benefits

To register a company in the U.S., several essential criteria must be met.

• Under this scheme, up to Rs 50 lakh in financial assistance will be provided to startups at an early stage through incubators.
• The incubator will disburse the seed fund to an eligible startup:
  - As a grant for validation of “prototype development, proof of concept or product trials”-  Up to Rs. 20 Lakh        
  - Investment for commercialization, market-entry, or scaling up through debt-linked instruments - Up to Rs. 50 Lakh
• Once incubated, physical infrastructure, testing support, mentoring for prototype or commercialization, human resources, and legal compliances are provided to the startups, all by the incubators.
• For eligible startups, income tax and capital gains tax exemptions are available.

Post funding process

Each incubator must track specific criteria for each beneficiary startup. Every beneficiary startup must present the reports to its incubators periodically. The data is submitted to Startup India in real-time via their web dashboards and further to the EAC quarterly. Each Startup’s return on investment is also reported by the designated incubator.

• Proof of concept
• Prototype development
• Progress of product development & field trials
• Turnover of startup
• Progress of market launch
• Quantum of loan, angel, or VC funding raised
• Jobs created by startup

Frequently Asked Questions