How a pre-IPO valuation is formed
The starting point is the value the company could achieve at the IPO. Advisers estimate it from listed peers on the target exchange, usually through multiples of earnings, EBITDA or revenue, and support it with a discounted cash flow model. The peer group matters: the same business may be valued differently on DFM, Saudi Exchange or HKEX, because the investor base, sector weights and liquidity differ.
From that estimate the parties then subtract the risks that a pre-IPO investor carries and an IPO investor does not:
- execution risk: the IPO may be delayed, priced lower or cancelled;
- market risk: the window may close, as it did in the Middle East from February 2026 according to PwC;
- liquidity risk: the shares cannot be sold until the listing and then the lock-up end;
- information risk: the investor sees a data room, not a prospectus reviewed by a regulator.
Negotiation does the rest. A strong equity story, audited numbers and a credible timetable narrow the gap. A thin audit history, an unfinished restructuring or a dependence on one customer widen it.
The discount as a mechanism
The discount can be fixed in two ways. In a priced round the investor buys at a set valuation today, and the discount is implicit: it equals the difference between that price and whatever the IPO price turns out to be. In a linked round the price is defined by reference to the future IPO price, for example as the IPO price minus an agreed percentage, often with a cap and sometimes with a floor.
| Approach | How the price is set | For the issuer | For the investor |
|---|---|---|---|
| Fixed valuation | Agreed number today | Certainty on dilution | Gain depends on the IPO price |
| IPO price minus discount | Formula linked to the IPO price | No need to agree valuation now | Discount is protected, upside is shared |
| Discount with cap | IPO price minus discount, but not above a cap | Dilution grows if the IPO price is high | Upside kept above the cap |
| Discount with floor | Price cannot fall below a floor | Limits dilution in a weak IPO | Less protection in a weak IPO |
There is no market standard for the size of the discount. It depends on how far away the IPO is, the quality of the company and the market. Any figure quoted as typical should be read as a negotiating position, not as a rule.
Ratchet and down-round protection
A ratchet protects the investor if the IPO price is below a reference level, usually the pre-IPO price or a price that gives the investor an agreed return. The adjustment is made by issuing extra shares to the investor, by changing the conversion ratio of preference shares or notes, or by a transfer of shares from the founders. Each method shifts value from other shareholders to the investor.
- Full ratchet: the investor's price is reset to the IPO price, whatever the gap. This is the most expensive version for founders.
- Partial or weighted ratchet: the adjustment covers part of the gap or is capped at a maximum number of shares.
- Time-based ratchet: the protection grows if the IPO is delayed, reflecting the longer wait.
Risks for the issuer
- Pricing pressure: a high pre-IPO valuation can make the IPO look expensive, while a ratchet can push the company to price low to avoid triggering it, or high to avoid dilution.
- Disclosure: ratchets, discounts and recent private prices are disclosed in the prospectus, and IPO investors compare them with the offer price.
- Dilution at the worst moment: a ratchet triggers exactly when the IPO is weak and founders have least room.
- Put exposure: if the IPO is late, a put at an agreed return may require cash the company does not have.
- Equal treatment: the exchange may object to terms that give one investor economic rights beyond other holders of the same class.
Who should set the valuation
Valuation work is done by financial advisers and, for the IPO, by the banks during bookbuilding. In the UAE, giving investment advice and arranging deals are licensed activities under the CMA regime, and similar rules apply in DIFC and ADGM, so the company should rely on licensed firms for investor-facing valuation. An independent view on value is also useful in negotiations with pre-IPO investors who bring their own models. This educational note is part of the Eurasia Consulting Group guide for issuers.