Pre-revenue startup valuation: methods and legal issues

Pre-revenue startup valuation: setting a figure… and a sound legal framework

Before revenue, a startup's valuation rests mainly on team quality, market size and evidence of execution. But in France, that amount must also fit a precise legal framework: registration, choice of form (often SAS/SASU), compliance with public aid rules, securities issuance and conversion rules. Here is a complete, practical method defensible in due diligence.

Before any valuation: secure the legal prerequisites

1) Registration and choice of company form

The company must be registered (SIREN/SIRET/APE) before any commitment to investors, securities issuance or signing of a term sheet. Official procedures and legal effects are explained on Service Public Pro. In practice, founders almost systematically choose the SAS/SASU for its flexible governance, easier fundraising and corporate income tax treatment. For the complete process, see the legal steps to creating your startup in France.

2) Accounting and tax obligations from Day +1

• Opening a business account, accrual accounting and declaration of existence for tax purposes (VAT/corporate income tax/personal income tax according to the option). A structured reminder is provided by Indy (2026 obligations) and this explanatory article on initial obligations, Legal obligations from company formation.
• Electronic invoicing timetable and 2026 tax measures: consult the official update Finance Act for 2026 – businesses.

3) Public aid, JEI and State aid caps

• Young innovative enterprise status (JEI/JEIC) may provide tax and social contribution exemptions, subject to conditions (SME, significant R&D expenditure, company age, etc.). Overview and eligibility tools on Bpifrance and Service Public Pro.
• Watch de minimis aid caps and their accumulation over three financial years. EU references and legislation on EUR‑Lex. Exceeding caps may require repayment of aid.

Practical tip: before any negotiation, create an aid/JEI eligibility sheet and place it in the data room. This avoids valuation renegotiation during due diligence.

Valuation methods suited to pre-revenue businesses

Berkus method (pre-seed)

A qualitative approach using “value building blocks” (team, technology/IP, prototype, go-to-market strategy, partnerships/initial traction). Each criterion receives a fixed amount (e.g. €0–300k), with the sum forming the pre-money valuation subject to a reasonable cap (often €1.5–2.5 million depending on sector and risk). Use this method where the product is at MVP/POC stage and commercial traction is embryonic.

Scorecard (business angels)

Start from a “median” valuation observed locally for comparable deals, then adjust it through weighting:

• Team/founders: ~30%
• Market size and dynamics: ~25%
• Product/tech/IP: ~15%
• Competition/advantage: ~10%
• Traction/evidence (LOIs, pilots, waiting lists): ~10%
• Other (regulation, partnerships, ESG): ~10%

The key is to source a credible, recent “reference”, then justify each coefficient with evidence (CVs, patents, KPIs, letters of intent).

VC method (Seed/emerging Series A)

Work backwards from a plausible exit and target return: target post-money valuation = Expected exit value / Target ROI (often 8–12× in seed). Investor share = Amount invested / post-money. Useful for designing realistic dilution, but it is not an “intrinsic” value: it is a target-risk equation.

Sector comparables

Compare recent rounds in the same sector/geography/stage, or proxy multiples (ARR multiples for revenue-generating SaaS; for pre-revenue, use alternative benchmarks: beta-list size, MVP activation rate, experimental acquisition cost). Document sources (public databases, announcements, dealrooms) and exclude outdated comparables.

DCF and option-based approaches

DCF is rarely persuasive before revenue (extreme sensitivity to the discount rate and assumptions). Use it only as an appendix, with bounded scenarios and justification of risk.

Triangulate a “defensible valuation” and translate it into legal terms

• Apply at least three methods (e.g. Berkus + Scorecard + VC/comparables).
• Exclude extremes, select a median and a range (minimum/median/maximum) justified by evidence (IP, pilots, pipeline, product KPIs).
• Formalise a Valuation Memo (2–4 pages) annexed to the term sheet and data room. This will facilitate legal due diligence and limit challenges.

For instruments, French practice favours BSA‑AIR and convertible bonds. Set a valuation cap consistent with your median and a transparent discount (often 10–25% according to risk). See our convertible notes and BSA‑AIR guide for conversion formulas and key clauses.

Legal issues that influence (and secure) valuation

Securities issuance and founder dilution

In a SAS, every capital increase or securities issue requires valid resolutions (president's powers, delegations, disapplication of preferential subscription rights, reports, etc.). A poorly handled procedure weakens the round and the selected valuation. Review the SAS capital increase procedure and anticipate shareholders' agreement clauses (anti-dilution, liquidation preference, investor information).

Convertible instruments: cap, discount and compliance

• Economic calibration: consistency between cap, discount and conversion horizon (target priced round) to avoid excessive later dilution.
• Documentation: resolutions, subscription forms, conversion conditions, trigger events and events of default.
• Crowdfunding/public offering: if you approach the general public, check the applicable framework (PSFP, DIB, financial information) with the AMF.

Intellectual property: consolidate the key asset before fundraising

Before revenue, IP weighs heavily in valuation. Ensure the transfer of all rights (code, algorithms, designs) to the company, trademark filings and protection strategies. Consult INPI and formalise assignments by founders and providers. Our dedicated guide details founders' intellectual property assignments.

BSPCE/AGA: exercise price and social contribution risk

The BSPCE exercise price must reflect a reasonable share value on the grant date. Undervaluation may create a risk of reclassification for social contribution/tax purposes. Document the selected method (valuation memo) and consistency with the latest round.

General compliance and enforceability

• Compliance with the articles and shareholders' agreement (pre-emption rights, information, approval thresholds).
• Clear drafting of term sheets and investment agreements to reflect valuation, possible adjustments and protection clauses.
• Legal references and enforceability: keep links/texts handy (Legifrance portal).

A 30-day process to set a defensible pre-revenue valuation

1. Map assets and risks (IP, data, contracts, debts, public aid, JEI status).
2. Consolidate evidence of non-financial traction (MVP, pilots, LOIs, product metrics).
3. Source 5–10 relevant comparables (sector, geography, stage) and document differences.
4. Apply Berkus + Scorecard + VC/comparables and build a range.
5. Set a cap and discount for a convertible instrument (BSA‑AIR), or a pre-money valuation for a priced round.
6. Draft the Valuation Memo (methodology, sources, assumptions, risks) and have a chartered accountant/lawyer review it.
7. Align governance (delegations/powers) and prepare issuance resolutions.
8. Update the data room (shareholders' agreement, articles, IP, aid, tax). Where data is involved, respect confidentiality/GDPR: good practices on the CNIL website.
9. Negotiate the term sheet and secure clauses affecting value (liquidation preference, anti-dilution, information).
10. Sign and execute, then publish the required changes.

Common pitfalls and signals investors look for

• Pitfalls: no registration before signing, aid accumulated beyond caps, IP not assigned to the company, opaque social contribution clauses for BSPCE, unsourced comparables, a single method without cross-checking.
• Signals: complementary team with proven achievements, tested MVP, documented pipeline, sourced valuation memo, clear governance, consistent cap/discount. To manage dilution, plan ahead with our guide to dilution during a capital increase.

Quick “pre-revenue” checklist

• Registration (SIREN/SIRET/APE) and SAS/SASU choice completed; tax/accounting obligations underway (Service Public Pro).
• JEI/aid eligibility checked (accumulation and de minimis caps to check on EUR‑Lex), see schemes on Bpifrance.
• Cross-checked methods (Berkus/Scorecard/VC/comparables) and archived sources.
• Cap/discount aligned for BSA‑AIR; resolutions ready; key clauses negotiated (liquidation preference, anti-dilution).
• IP assigned to the company; trademarks/software protected through INPI.