Valuing Equity in Start-ups1:Discounted Free Cash to Equity

Free Cash Flows are defined as cash flows that remain after we subtract from expected revenues any expected operating costs and the capital expenditures necessary to sustain, and hopefully improve, the cash flows. The Free Cash Flows to Equity (FCFE) represent the free cash available to the equity holder of the company and are good measure of the company’s capacity to pay dividends and provide capital gains opportunity to its equity investors. Discounted FCFE, is therefore, the most appropriate way to value equity of a company which is in its initial life cycle stage, does not trade in public and so far has not paid dividends.