The Backsolve Method to Value Common and Preferred Stock

, The Legal Intelligencer

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The valuation of early-stage companies can pose unique challenges because of a lack of historic earnings or operating cash flow. However, when there has been a contemporaneous arm’s-length transaction such as a recent financing round, one can estimate the value of the company using a valuation method known as the backsolve method. This market-based valuation method has gained prominence in the valuation community. This is evident with the release of the American Institute of Certified Public Accountants’ 2013 guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, in which this method is discussed extensively.

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