Early Stage Valuation

CHAPTER 5The Backsolve Method

Neil Beatonand Antonella Puca

The market approach has a privileged role under the fair value standard for its focus on market-based inputs. A common methodology under the market approach is to estimate the value of a company starting from the value of the company's individual equity interests. For a public company with shares traded on a stock exchange or in the over-the-counter market, the equity value of the company can be expressed in terms of its market capitalization, which is determined by multiplying its outstanding shares by their market prices. For private companies that do not have listed securities, the issue price of the company's own stock in a private offering often provides the most relevant market-based observable input for its equity valuation. As was discussed in Chapter 3, privately held companies typically have several classes and series of securities, with different rights and privileges. In an early stage enterprise (ESE) with a complex capital structure, a valuation of the enterprise based on a simple formula, which assigns the same value to all securities is often not suitable to generate a point estimate that complies with the fair value standard under ASC 820/IFRS 13.

This chapter presents the Backsolve method as a common method under the market approach to estimate the equity value of a company with multiple classes/series of shares starting from the price of actual transactions in the company's own stock. The Backsolve ...