Private Company Valuation: Complete Guide

Last Updated: January 2026

Why Valuation Matters

Understanding private company valuation is critical for anyone buying unlisted shares, exercising stock options, or evaluating equity compensation. Unlike public companies with real-time market prices, private company valuations are opaque, infrequent, and vary dramatically depending on the context and methodology.

The same private company can have multiple "valuations" simultaneously:

• $5 billion post-money valuation from recent Series D funding round
• $3 billion implied valuation based on 409A common stock price
• $3.5 billion implied valuation from recent secondary market transactions
• $6 billion valuation from DCF analysis using aggressive growth assumptions

Each valuation serves a different purpose and is calculated using different assumptions. This guide explains how to interpret these valuations and use them to make informed investment decisions.

Types of Valuations

Private companies are valued in several different contexts, each serving specific purposes and using different methodologies.

1. Funding Round Valuation (Preferred Stock)

What it is: The price per share that venture capital investors pay in a funding round (Series A, B, C, etc.), which implies a total company valuation.

How it's calculated:

• Negotiated between company and investors based on traction, comparable companies, and market conditions
• Post-money valuation = Price per preferred share × Total shares outstanding after funding
• Pre-money valuation = Post-money valuation - Investment amount

Example:

• Company raises $100M Series C at $10.00 per preferred share
• 10 million new shares issued
• Total shares after funding: 60 million
• Post-money valuation: $10.00 × 60M = $600M
• Pre-money valuation: $600M - $100M = $500M

What it means:

• This is the "headline" valuation you see in press releases ("Company raises $100M at $600M valuation")
• Reflects price for preferred stock with liquidation preferences, anti-dilution protection, and other special rights
• Common stock (what employees own) is worth less than preferred—typically 60-80% of preferred price
• Not necessarily what company would sell for in acquisition or trade at in IPO

Key terms to understand:

• Up round: Valuation increased from previous round (positive signal)
• Flat round: Same valuation as previous round (concerning—no progress in 12-24 months)
• Down round: Lower valuation than previous round (major red flag—company struggling)

2. 409A Valuation (Common Stock)

What it is: IRS-compliant appraisal determining fair market value (FMV) of common stock, used to set strike prices for stock options.

How it's calculated:

• Performed by independent valuation firms (Carta, Pulley, Aranca, etc.)
• Uses option pricing models (Black-Scholes, binomial) and scenario analysis
• Applies discounts to preferred stock price for lack of liquidity, lack of control, and absence of preferred rights
• Follows IRS guidelines to create "safe harbor" from tax penalties

Typical discount from preferred price:

• Early stage (Seed/Series A): 50-60% discount (409A might be $2 if preferred is $5)
• Growth stage (Series B/C): 30-40% discount
• Late stage (Series D+): 20-30% discount
• Pre-IPO: 10-20% discount (converging toward IPO price)

What it means:

• Most relevant valuation for employees—reflects what your common stock is actually worth today
• Updated annually or after "material events" (new funding, major milestones)
• Conservative by design (IRS wants to prevent companies from undervaluing options)
• Used to calculate potential value of your equity holdings

See our detailed 409A Valuation Guide for more.

3. Secondary Market Valuation

What it is: Prices at which common stock actually trades in secondary markets (Forge Global, EquityZen, etc.).

How it's determined:

• Supply and demand—what buyers will pay and sellers will accept
• Influenced by company performance, IPO prospects, market sentiment, and available information
• Typically trades at 1.0-1.5x 409A valuation or 60-80% of preferred price

What it means:

• Most "real" valuation—actual transactions between sophisticated parties
• Reflects true market value better than theoretical models
• Can vary significantly based on buyer demand (hot companies trade at premiums, struggling companies at discounts)
• Used by investors to price purchases and sellers to price sales

Example:

• Preferred stock: $20.00 (last funding round)
• 409A valuation: $14.00
• Recent secondary sales: $16-$18 (1.14-1.29x 409A, 80-90% of preferred)

For hot pre-IPO companies (Stripe, SpaceX), secondary prices can exceed preferred price as buyers anticipate IPO pop.

4. Fundamental Valuation

What it is: Analytical valuation using financial models (DCF, comparable companies, etc.) to estimate intrinsic value.

How it's calculated:

• Discounted cash flow (DCF): Project future cash flows, discount to present value
• Comparable company analysis: Compare to public companies with similar business models
• Precedent transactions: Look at M&A prices for similar companies
• Revenue/EBITDA multiples: Apply industry multiples to company's metrics

What it means:

• Used by sophisticated investors to evaluate whether current price is attractive
• Highly dependent on assumptions (growth rates, margins, discount rates)
• Useful for sanity-checking whether valuation is reasonable
• Should be compared against funding round and secondary market prices

Valuation Methods

Private company valuations use several analytical approaches. Understanding these methods helps you evaluate whether a stated valuation is credible.

Comparable Company Analysis (Comps)

Method: Value private company by comparing to publicly traded peers.

Process:

1. Identify 5-10 public companies with similar business models, markets, and stage
2. Calculate valuation multiples (EV/Revenue, EV/EBITDA, P/E) for peers
3. Apply median or average multiple to private company's metrics
4. Apply illiquidity discount (20-40%) for private company

Example:

• Private SaaS company: $100M ARR, 80% growth, -20% operating margin
• Public SaaS peers: Trading at 8-12x revenue (median 10x)
• Implied valuation: $100M × 10x = $1B
• Less 30% illiquidity discount = $700M valuation

Strengths:

• Based on real market prices
• Easy to understand and calculate
• Captures market sentiment

Weaknesses:

• Comparable companies are never truly comparable
• Public market multiples fluctuate with market sentiment (tech bubble vs. crash)
• Illiquidity discount is subjective
• Difficult to find good comps for unique business models

Precedent Transaction Analysis

Method: Value private company based on prices paid in recent M&A transactions of similar companies.

Process:

1. Research recent acquisitions in same sector/stage
2. Calculate multiples paid (acquisition price / revenue, EBITDA, etc.)
3. Apply multiples to private company's metrics

Example:

• Private cybersecurity company: $50M revenue
• Recent cybersecurity acquisitions: Trading at 6-10x revenue (median 8x)
• Implied valuation: $50M × 8x = $400M

Strengths:

• Reflects actual prices acquirers paid
• Captures synergies and strategic premiums
• Relevant for companies considering acquisition as exit

Weaknesses:

• Deal terms often not fully disclosed
• Acquisition prices include synergies (not intrinsic value)
• Limited data availability
• M&A multiples vary with macro conditions

Discounted Cash Flow (DCF)

Method: Value company as present value of all future cash flows.

Process:

1. Project free cash flows for 5-10 years
2. Estimate terminal value (cash flows beyond projection period)
3. Discount all cash flows to present value using weighted average cost of capital (WACC)
4. Sum present values = company valuation

Simplified example:

• Year 1-5 projected free cash flows: $10M, $15M, $22M, $32M, $45M
• Terminal value (perpetuity growth model): $900M
• Discount rate (WACC): 15%
• Present value of cash flows: $8.7M + $11.3M + $14.5M + $18.3M + $22.4M + $447M = $522M

Strengths:

• Based on fundamental cash generation
• Theoretically most "correct" valuation method
• Forces explicit assumptions about growth and profitability

Weaknesses:

• Highly sensitive to assumptions (small changes in growth or discount rate = massive valuation swings)
• Difficult for early-stage companies with no cash flows
• Terminal value dominates total (often 70-90% of valuation)
• "Garbage in, garbage out"—wrong assumptions = wrong valuation

Berkus Method and Scorecard (Early Stage)

Method: Value pre-revenue startups based on qualitative factors.

Berkus Method assigns value for achieving milestones:

• Sound idea (basic value): $0-$500K
• Prototype/product: $0-$500K
• Quality management team: $0-$500K
• Strategic relationships: $0-$500K
• Product rollout/sales: $0-$500K
• Total potential: $2.5M valuation

Scorecard Method:

• Start with average valuation for companies at same stage/geography
• Adjust up/down based on team (0-30%), market size (0-25%), product (0-15%), competition (0-10%), etc.

Best for: Seed-stage companies without revenue or meaningful metrics

Venture Capital Method

Method: Work backward from expected exit valuation to determine current value.

Process:

1. Estimate exit value in 5-7 years (IPO or acquisition)
2. Apply target return rate (VCs typically want 10x in 5 years = 58% IRR)
3. Discount exit value to present

Example:

• Expected exit value in 6 years: $1B
• VC wants 10x return
• Investment needed: $20M
• Post-money valuation: $1B / 10x = $100M
• Pre-money valuation: $100M - $20M = $80M

Backsolve Method (Used in 409A)

Method: Work backward from preferred stock price to determine common stock value.

Process:

1. Start with recent preferred funding round price
2. Model equity value as portfolio of options based on liquidation preference waterfall
3. Use option pricing models to allocate value across share classes
4. Solve for common stock value

This is highly technical and typically performed by professional valuation firms for 409A reports.

Understanding Share Classes and Liquidation Preferences

Not all shares are created equal. Private companies have complex capital structures with different share classes carrying different rights and preferences. This directly affects what your investment is worth.

Common Stock vs. Preferred Stock

Common Stock:

• What founders and employees typically own
• Last in line for liquidation (paid after all preferred)
• Voting rights (usually 1 vote per share)
• Participates in upside after preferred are paid
• Can be subdivided into Class A and Class B (different voting rights)

Preferred Stock:

• What investors receive in funding rounds
• Priority in liquidation (paid before common)
• May have additional rights (board seats, veto powers, anti-dilution, dividends)
• Different series (Series A, B, C, etc.) with different preferences
• Converts to common stock in IPO

Liquidation Preferences Explained

Liquidation preference determines the payout order and amounts when company is sold or liquidated. This is THE most important term affecting common stock value in exit scenarios.

1x Non-Participating Preferred (Standard):

• Preferred investors get back their investment amount first
• Remaining proceeds distributed to common shareholders
• Preferred can choose: take liquidation preference OR convert to common and share proportionally

Example (1x non-participating):

• Company acquired for $200M
• Investors put in $100M (10M preferred shares at $10)
• Founders/employees own 10M common shares
• Payout: Investors get $100M first (1x liquidation preference), then remaining $100M split proportionally among all shareholders
• Preferred converts to common (better deal): All $200M split 50/50 = $100M to investors, $100M to common

Participating Preferred (More Aggressive):

• Preferred get liquidation preference PLUS participate in remaining proceeds with common
• Also called "double-dipping"
• Much worse for common shareholders

Example (1x participating):

• Same scenario: $200M acquisition, $100M invested
• Payout: Investors get $100M first, THEN participate in remaining $100M pro-rata
• If ownership is 50/50, investors get $100M + $50M = $150M, common gets $50M
• Investors effectively get 75% of proceeds despite owning 50% of equity

2x, 3x, or Higher Liquidation Preferences:

• Investors get 2x or 3x their money back before common shareholders get anything
• Typically seen in down rounds or rescue financing
• Can completely wipe out common stock value except in large exits

Example (3x non-participating):

• Down round: Investors put in $50M at 3x liquidation preference
• Company acquired for $100M
• Investors get 3x × $50M = $150M... but only $100M available
• Investors take all $100M, common gets $0

Stacked vs. Pari Passu Preferences

Stacked (Standard):

• Later series get paid first, then earlier series
• Series C paid before Series B, which is paid before Series A
• Last money in, first money out

Pari Passu (Rare):

• All preferred series share liquidation preference proportionally
• More favorable to early investors and common

Why This Matters for Your Investment

Common stock value highly dependent on liquidation preferences:

Before investing in common stock:

• Ask about total liquidation preference stack (total $ that must be paid to preferred before common gets anything)
• Understand whether preferences are participating or non-participating
• Model various exit scenarios to see when common stock has value
• If liquidation preferences exceed likely exit values, common may be worthless

Anti-Dilution Provisions

Anti-dilution protections adjust investor ownership if company raises money at lower valuation (down round).

Full Ratchet (Most Aggressive):

• Previous investors' conversion price adjusted down to new round price
• Protects investors completely at expense of common shareholders
• Rare except in distressed situations

Weighted Average (Standard):

• Conversion price adjusted based on weighted average of old and new prices
• Dilution shared between investors and common
• Most common in normal funding rounds

Impact on common shareholders: Down rounds trigger anti-dilution, which increases preferred share counts and dilutes common ownership percentage beyond the new money raised.

Red Flags in Valuations

Not all valuations are credible. Watch for these warning signs that suggest overstated or questionable valuations.

Red Flag 1: Down Rounds

What it means: Company raised money at lower valuation than previous round

Why it's concerning:

• Company hasn't grown into previous valuation
• May indicate missed targets, deteriorating business, or previous overvaluation
• Often accompanied by aggressive terms (participating preferred, high liquidation preferences)
• Common stock may be underwater or severely diluted

Not always fatal: Some great companies have had down rounds (Facebook in 2009). Evaluate whether company is fixing problems or in terminal decline.

Red Flag 2: Flat Rounds

What it means: Same valuation as 12-24 months ago

Why it's concerning:

• Company made no progress over extended period
• May be masked down round (same headline price but worse terms)
• Investors lost confidence in growth trajectory

Red Flag 3: Old Valuations

What it means: Last funding round was 2-3+ years ago

Why it's concerning:

• Company hasn't been able to raise new money (investors passed)
• Stated valuation is stale and may not reflect current reality
• Company may be struggling to grow or burning cash
• High risk of down round when next funding occurs

Exception: Profitable companies that don't need to raise may go years without fundraising (positive signal).

Red Flag 4: Excessive Liquidation Preferences

What it means: Total liquidation preference stack exceeds $500M but company valued at $600M

Why it's concerning:

• Common stock worthless except in very large exits
• Preferred investors protected, common shareholders take all the risk
• Suggests company has taken multiple rescue rounds with onerous terms

How to check: Add up all preferred stock investment amounts × liquidation multiples. If this exceeds 60-70% of company valuation, be wary.

Red Flag 5: Participation Preferred

Why it's concerning: Participating preferred severely dilutes common shareholder returns in exit scenarios under 3-5x return on invested capital.

Best practice: Avoid investing in common stock at companies with participating preferred unless valuation is extremely attractive.

Red Flag 6: Missing or Opaque Information

What it means: Company won't share basic metrics like revenue, growth rate, burn rate, or cap table

Why it's concerning:

• Can't perform diligence or validate valuation
• Company may be hiding poor performance
• Increases risk dramatically

Minimum information required for informed investment:

• Revenue and growth rate (or key metrics for pre-revenue)
• Profitability or burn rate and runway
• Cap table (total shares, liquidation preferences, ownership structure)
• Recent funding details (round size, valuation, investors)
• 409A valuation and date

If company refuses to provide this, walk away.

Red Flag 7: Unrealistic Projections

What it means: Company projects 10x revenue growth over 2 years with no credible plan

Why it's concerning:

• DCF valuations based on fantasy projections are meaningless
• Management may be delusional or intentionally misleading
• Promises unlikely to materialize

Sanity check: Compare projections to comparable company growth rates and achievement of past projections. If management missed last 3 years' targets by 50%, don't believe next year's 200% growth forecast.

Red Flag 8: Valuation Based Solely on "Story"

What it means: Company valued at $2B based on vision and market size with $2M revenue and huge losses

Why it's concerning:

• Stories are easy, execution is hard
• Many companies chase huge markets; winners are rare
• Valuation disconnected from fundamentals is speculation

Doesn't mean avoid: Early-stage investing is inherently speculative. But price appropriately—don't pay late-stage valuations for early-stage companies.

What Affects Secondary Market Price

When buying or selling on secondary platforms, prices are determined by market dynamics beyond just fundamental valuation.

Company-Specific Factors

IPO timeline and prospects:

• Companies with visible IPO path (filed S-1, selected bankers) trade at premiums
• Buyers pay up anticipating near-term liquidity and IPO pop
• 6-12 months from IPO: 80-100% of preferred price common
• 2+ years from IPO: 60-70% of preferred

Financial performance and growth:

• Strong revenue growth, path to profitability = premium pricing
• Decelerating growth, high burn rate = discount pricing
• Buyers will pay 1.2-1.5x 409A for excellent companies, 0.8-1.0x for mediocre

Historical liquidity:

• Companies with regular tender offers have active, liquid secondary markets
• Buyers comfortable paying fair prices when they know future liquidity exists
• Companies blocking all sales have illiquid markets with steep discounts

Brand and visibility:

• Well-known companies (Stripe, SpaceX, Databricks) attract more buyers and command premiums
• Obscure companies require discounts to compensate for information asymmetry

Market and Macro Factors

Tech market sentiment:

• Bull markets: Private valuations and secondary prices rise across the board
• Bear markets: Secondary liquidity dries up, prices drop 20-40%
• Example: 2021 peak saw secondary premiums; 2022-2023 correction saw 30%+ discounts

Public market comparables:

• When public SaaS stocks trade at 15x revenue, private SaaS companies command higher prices
• When public stocks crash to 3x revenue, private companies reprice downward
• Private markets lag public by 6-12 months but eventually correlate

IPO market conditions:

• Active IPO market: Private companies more valuable (clear exit path)
• Frozen IPO market: Private valuations compressed (uncertain liquidity timeline)

Supply and Demand Dynamics

Seller urgency:

• Desperate sellers (need cash immediately) accept 10-20% discounts
• Patient sellers can wait for best price

Buyer competition:

• Hot companies with many interested buyers see bidding wars and premium prices
• Unwanted companies have few buyers and trade at discounts

Block size:

• Large blocks ($1M+) may require 5-10% discount (fewer qualified buyers)
• Small blocks ($10K-$50K) trade at full market price (many buyers)

How to Evaluate a Private Company Investment

Bringing it all together: a framework for evaluating whether to invest in unlisted shares at a given valuation.

Step 1: Understand What You're Buying

• Common stock, preferred stock, or SPV units?
• What percentage of company fully diluted?
• What rights/preferences do your shares have?
• What are liquidation preferences and cap table structure?

Step 2: Gather Valuation Data Points

• Last funding round (price, date, investors, terms)
• Most recent 409A valuation (price and date)
• Recent secondary market transactions (price range)
• Your proposed purchase price

Step 3: Assess Business Fundamentals

• Revenue and growth: How fast is company growing? Accelerating or decelerating?
• Path to profitability: When will company be profitable? What's the burn rate and runway?
• Market opportunity: Is TAM large enough to support valuation?
• Competitive position: Is company a leader or laggard?
• Team quality: Are founders/executives proven winners?

Step 4: Model Exit Scenarios

Create base, bull, and bear scenarios:

Base case (50% probability):

• Exit value: $5B (Company IPOs in 3 years)
• Your stake: 0.05% = $2.5M
• Return: $2.5M / $100K investment = 25x

Bull case (25% probability):

• Exit value: $15B (massive success)
• Your stake: 0.05% = $7.5M
• Return: 75x

Bear case (25% probability):

• Exit value: $800M (disappointing acquisition)
• After liquidation preferences, common gets $200M
• Your stake: 0.05% of $200M = $100K
• Return: 1x (breakeven)

Expected value: 0.50 × 25x + 0.25 × 75x + 0.25 × 1x = 31.5x expected return

Step 5: Compare to Alternative Investments

• S&P 500: ~10% annual return (1.9x over 7 years)
• Diversified VC fund: 3-5x target return over 10 years
• Your investment: 25-30x expected return over 3-5 years

Risk-adjusted: Factor in illiquidity (can't sell for years), concentration risk (single company), and binary outcomes (total loss possible).

Step 6: Verify Price is Reasonable

• Is your purchase price close to recent 409A (within 1.0-1.5x)?
• Is it aligned with recent secondary sales?
• Are you buying at 60-80% of preferred price (appropriate discount)?
• Does comparable company analysis support valuation?

Step 7: Make Go/No-Go Decision

Invest if:

• Expected value analysis shows attractive returns (20x+ over 3-5 years)
• Downside is limited (reasonable floor valuation, not overpriced)
• You believe in company's prospects based on diligence
• Allocation is appropriate for your portfolio (2-10% of net worth)
• You can afford to lose the entire investment

Pass if:

• Price seems inflated relative to fundamentals
• Red flags in cap table (excessive liquidation preferences, participation)
• Company won't share basic information
• Expected returns don't justify risk (less than 10x upside)
• You need liquidity in next 3-5 years