Model Determination for Equilibrium Valuation of Startup Companies Using Real Option Method in the Presence of Agency Cost

Document Type : Research Paper


1 Assistant Prof., Department of Financial and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran.

2 Prof., Department of Accounting, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran.

3 Associate Prof., Department of Industrial Management, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran.

4 Ph.D. Candidate, Department of Financial Management, Faculty of Management and Accounting, University of Allameh Tabataba’i University, Tehran, Iran.


Objective: Given the importance of start-up companies valuation for investors and entrepreneurs, this study seeks to determine the value that balances their expectations through an appropriate valuation. As a result, it is expected that a more accurate valuation will be obtained by taking into account the flexibility available to start-up companies. This scan be done through the real option method, as well as by considering the effect of non-normal distribution of cash flows and agency costs.
Methods: In first step, the real option method is applied to value the startup companies. Then, Skewness and Kurtosis Adjusted Black Scholes Model is used, while considering the non-normal distribution of cash flows. In the next step, the valuation of the startup companies is done in the presence of agency cost. And finally, the equilibrium point of investor and entrepreneur is found by creating the Edgeworth box.
Results: Using data from ten startup companies in investment banks which have been valued by the investment banks, it is indicated that using the ultimate research model with the purpose of determining the equilibrium value by the Edgeworth box, will result in statistically acceptable values.
Conclusion: The final model presented in this research taking into consideration the two factors of non-normal distribution of cash flows and agency costs in calculating the value of real option as the preferred method in valuing start-ups, which includes flexibility in decision making, along with the calculation of the equilibrium point of entrepreneur and investor using the Edgeworth box has led to a good equilibrium value without the need to apply different discount rates in the different startup companies.


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