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03 February 2025 4 min read
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Ibrahim Khan
Co-founder
This is the first year in which a number of investors will need to work out Zakat on startups invested in through Cur8, and so we have been preparing notes for our investors.
As there is wider benefit for the Muslim community, we thought we’d share around these notes on how to calculate zakat on startups.
In this article we cover:
You should also definitely check out our zakat calculator here. It will help you calculate zakat on startups and lots of other investments.
Generally, zakat is calculated on businesses by totalling up cash plus certain receivables, the value of stock and deducting short-term liabilities. The resulting amounts are the zakatable assets. You only pay zakat on your percentage of ownership over these zakatable assets.
Cash: £50
Receivables: £500
Stock: £50
Short-term liabilities: £100
Total zakatable assets: £500
Zakat due (2.5%): £12.50
This is of course just a high-level overview of business zakat. For further details on zakat on investment see here. For guidance on zakat on business assets see here.
There are two main approaches to take when calculating zakat on startups.
In one you take an approximation on the cash/zakatable assets sat in the company, and in the other you get a precise number.
Please note that as a rough guide, we would typically expect a startup to burn about 50% of its last raise every year.
Let’s give an example for approach 2. If a startup says, based on their last post-money valuation, that they have 10% zakatable assets, then you need to work out how much you pay on that. Your investment at the last round was £10,000. You will therefore work out 10% of £10,000 which is £1,000. This is the portion of the zakatable assets that you are responsible for. So you work out 2.5% of that and pay £25.
As a reminder, a premoney valuation is what valuation the company goes out to fundraise on. It might be fundraising at a £4m valuation for example and looking to raise £500,000. Once it has raised that £500,000, it now has a post-money valuation of £4.5m, which is simply the premoney valuation and adding the cash investment to it.
So, for the startup to work out its zakatable assets percentage, it will use this post-money valuation. Overall, if the startup has £450,000 in cash in the account on the zakat date, the calculation is £450,000/£4.5m = 10%
If your startup investment has gone through multiple rounds, using their last premoney valuation is not that useful. You need to find out exactly what your percentage shareholding is and the zakatable assets they have. Then you can work out how much of their zakatable assets you are directly exposed to and pay 2.5% on that.
Finally, if you invest via SAFEs or ASAs or CLNs, our view is that you should treat this as equivalent to holding equity in the startups and apply the same analysis as above.
There are specific considerations for founders to consider when it comes to zakat on their portion of the zakatable assets.
The standard approach set out above can also work for founders in that it will give a number that they have to pay.
But that number may be so large as to lead to counterintuitive conclusions.
Bear in mind that founders are on very low salaries and typically are young and low on savings.
Let me give a few examples.
The point should be obvious. Founders are only rich on paper and cannot realistically afford to pay zakat in many cases.
So what to do?
Here are a few solutions:
The reasoning behind (2) is that, if the company were to liquidate today, you would typically not get the entire pot of money. Typically, this would go to preference share holders first, and, even where there are no preference shares, founders will usually pay out that money to investors out of a sense of fair play.
The entrepreneurs are contributing their labour to the project while investors contribute money. It so happens that under the limited company structure this contribution of labour to the project results in the attribution of a large amount of money to them directly.
Our preferred approach at this moment in time is a combination of (1), (3) and (4) as this allows the startup founder sufficient flex to make her zakat affordable, but also sticks to the essence of zakat. (4) might also actually add value to the business commercially too as a corollary of the donation (though of course that should not be the intention).
If this is throwing up some really counter-intuitive results for you, then please feel free to drop us a line or comment in the fatwa forum as this is a topic we are continuing to learn about collectively as a community of Muslims startup founders and investors.
As a principle, a Muslim shareholder is only responsible for paying Zakat on his share of net Zakatable assets in a startup. A startup is unique in the sense that its founders can be average people from modest backgrounds who have developed a convincing proof-of-concept and raised an astronomical amount in the seed round or series A, B etc. At present, my view is that a shareholder in a startup should consider the following:
Finally, every person in such a predicament should consult a Mufti and a Zakat expert to ensure they are calculating correctly. You can do that at the IFG fatwa forum.
03 February 2025 4 min read
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