Private company valuations: What to expect

What is a private company valuation?

A private company valuation is a professional and independent assessment of what your business is worth. Unlike public companies, which have stock prices that are constantly updated on a stock market exchange, you determine a private company’s value at specific moments, such as following a fundraise or before offering equity compensation. This process uses established methodologies to provide an objective measure of fair market value (FMV), which is the price an asset would sell for on the open market.

Private company valuations are typically performed by analysts at accountancy firms, law firms or equity management providers. They are typically based on information provided by the company including its specific circumstances (for example, its funding stage), financial statements, projections and cap table data. An analyst will determine the most appropriate valuation method or methods to apply. Because private company valuations are inherently appraised or estimated, the process can introduce distortions without a rigorous approach.

A valuation gives you a concrete number to work with when you're making some of the biggest decisions for your company. It's a snapshot of your company's worth at a specific point in time, based on a combination of your performance, market conditions, and future potential. This process brings clarity and credibility to your operations, both internally for your team's compensation and headcount planning, and externally for investors and auditors.

Think of a valuation not as a test you can pass or fail, but as a necessary tool for making informed decisions about your company's future. Different types of business valuations are critical for activities like fundraising, offering equity compensation to new hires, and staying compliant with tax regulations. Having a clear, defensible valuation helps you operate professionally and plan for growth with confidence.

Difference between private and public company valuations

The core difference between valuing a private and public company comes down to the availability of information and liquidity. Publicly traded companies have readily available financial data and a stock price that the daily trading of numerous buyers and sellers on stock exchanges determines. This provides a clear, market-driven valuation.

In private markets, company stock is illiquid, making it difficult for founders, employees, and private firms to sell their shares. This difficulty reflects how long they may have to wait for a potential liquidity event; for instance, VC-backed companies that went public in 2024 waited a median of 7.5 years from their first funding to going public.

When do you need a private company valuation?

These private company valuations are a recurring part of building and scaling your company. You'll find that you need an updated valuation at several key milestones in your startup's journey. It's a process that marks your progress and prepares you for the next stage of growth.

To prepare for a funding round

Before investors write a check during priced rounds, they use comprehensive data to agree on a valuation to determine the price-per-share for their investment. This calculation dictates how much equity in the business they receive in exchange for their capital. A third-party business valuation may help provide a starting point for this negotiation, grounding the conversation in a defensible analysis of your company's worth.

Having a professional, defensible valuation adds credibility to your fundraising efforts. It can make the due diligence process smoother by showing potential investors that you run your company with a high degree of professionalism and care. It signals that you're prepared and serious about managing your company's equity and finances.

Pre-money vs. post-money valuations

During a fundraising round, you'll need to understand the difference between pre-money vs. post-money valuations. These are two sides of the same coin, and you use them to determine how much ownership an equity investor receives for their investment.

Pre-money valuation is what your company is valued at before it accepts new investment. Post-money valuation is the value of your company after the investment is added. The relationship is simple:

 Pre-Money Valuation + Investment Amount = Post-Money Valuation

This calculation determines the price-per-share for the new priced round.

To grant employee stock options

If you plan to offer stock options to your U.S. employees as part of a stock option plan, you will need a formal 409A valuation. This valuation is used to set the strike price of the stock options, which is the price your employees will pay to purchase their shares. The strike price must be at or above the FMV of the common stock on the date the options are granted.

Getting this right is about protecting your team. An incorrect strike price can lead to serious tax penalties and complex employee stock option tax questions for your team. Therefore, a compliant 409A valuation is a non-negotiable part of offering a competitive equity package. It makes certain that your equity grants, which are drawn from the employee option pool, are fair, compliant, and a true benefit to your employees.

To meet tax and compliance requirements

Other business activities may also require a valuation. For example, a limited liability company (LLC) needs a valuation when issuing profits interests to its members. You will also need one when preparing for a financial audit, as auditors will review the accounting and want to see a defensible record of your company's value.

The right platform helps automate these processes. This keeps you audit-ready without the administrative headache, letting you focus on your business. A regular valuation becomes part of your standard operating procedure, not a disruptive fire drill.

How are private companies valued?

The process of determining the value of a private company can sometimes feel like a black box. However, most professional valuations use a combination of three standard approaches to arrive at a defensible number. Think of it as a blend of art and science, where analysts use multiple methods to get a balanced and well-rounded view of your company's worth.

The market approach: Comparing your company to others

This method is a form of comparable company analysis, often using the guideline public company method. You can think of it like seeing what similar houses in your neighborhood recently sold for. A valuation analyst looks at comparable public companies or private companies that were recently acquired to gauge your company's worth.

This approach often uses precedent transaction data like valuations, deal multiples, and deal sizes, which are shorthand ratios that show what the market price is for a private business like yours. They apply an average multiple from the comparable companies, or “comps,” to your own metrics to get a baseline valuation.

Valuation multiples

Valuation multiples are financial ratios that help compare your company to others. Investors use them to get a quick sense of your company's value relative to its performance.

• Price-to-earnings (P/E) ratio: This compares a company's stock price to its earnings-per-share. It's more common for mature, profitable companies.

• Enterprise value-to-revenue (EV/revenue) ratio: This multiple is often used for growth-stage companies that may not yet be profitable, especially in sectors like Software-as-a-Service (SaaS). For these companies, investors frequently focus on annual recurring revenue (ARR) as a key valuation metric from their financial statements. This emphasis on top-line growth over immediate profit is standard practice; for instance, during the 2021 investment peak, only 22% of SaaS companies that went public were already profitable. Instead of focusing on net income, many investors use frameworks like the Rule of 40, which balances a company's year-over-year ARR growth rate with its free cash flow margin to assess its overall health and potential.

• Enterprise value-to-EBITDA (EV/EBITDA) ratio: This compares enterprise value to earnings before interest, taxes, depreciation, and amortization. It's a popular multiple because it looks at profitability before accounting and financing decisions.

• Price-to-sales (P/S) ratio: This ratio compares the company's market capitalization to its total sales. It's another useful metric for early-stage companies where earnings are not yet stable.

The key is finding similar companies that are truly comparable in terms of industry, size, and growth stage. This provides a real-world benchmark for what your company could be worth in the current market.

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The income approach: Projecting your future growth

The income approach often uses the Discounted Cash Flow (DCF) method. This method estimates your company’s current value by forecasting the cash it is expected to generate in the future and discounting those cash flows back to today. The discount rate used reflects the risk that your company may not meet these projections and is often based on your company’s cost of equity or overall cost of capital, which represents the return investors expect for providing financing.

This method is forward-looking and focuses on your company's ability to generate profit over time. It's a way of quantifying the future earnings you're building.

This can be a difficult method for early-stage startups, which face uncertainty from the moment they incorporate a startup, with little to no revenue history. Because of this uncertainty, the income approach is often balanced with other valuation methods to create a more complete picture.

The asset-based approach: Valuing your assets

This approach calculates a company's value by adding up all its assets and subtracting its liabilities. The result is the company's net asset value. This method is straightforward and provides a baseline value for the company.

This approach is most relevant for companies with significant physical assets, like manufacturing or real estate businesses. It provides a clear, objective measure of the company's tangible worth.

This method is less common for technology startups because their main sources of value are intangible assets. Instead, investors often use a market-based method; for instance, venture capital fund managers typically value a private company by marking it against the known valuation of comparable companies in the market.

What do investors look for in a fundraising valuation?

Knowing the methods investors in private equity and venture capital use to value a company, you can focus on the factors that build a more valuable company. These are the core drivers that influence how investors, and valuation analysts, perceive your company's worth.

• Management team: Investors are betting on you and your team's ability to execute your vision. A strong, experienced team with a proven track record can often command a higher valuation, and it's not hard to see why. Investors are often more willing to bet on founders who have already achieved success. For example, the co-founders of Revefi found that their past experience leading a unicorn startup valued at $4.2 billion was a huge help in opening doors for their next company. "We were able to have good conversations with almost any VC we reached out to," says co-founder Sanjay Agrawal. This level of access and investor confidence is what allows seasoned founders to negotiate more favorable terms.

• Market size: A large and growing total addressable market (TAM) means there is more room for your company to expand. This makes it a more attractive investment opportunity because it signals a greater potential for scale and long-term success.

• Revenue and growth: Predictable revenue streams and a demonstrated history of strong, consistent growth are powerful signals to investors and show a clear understanding of planned capital expenditure for future growth. They show that your business model is working and that you have traction in the market.

• Competitive advantage: This could be proprietary technology, a strong brand, or unique intellectual property that creates a "moat" around your business. A durable competitive advantage makes it harder for others to replicate your success, protects your future market share, and is a key component of successful business exit strategies.

• Customer base: A diverse and loyal customer base reduces risk. Investors may see heavy reliance on a few large customers, known as customer concentration, as a weakness, which can lower your valuation during due diligence.

Fundraising valuation vs. 409A valuation

It's common for founders to confuse a 409A valuation with a fundraising valuation, but they are different numbers used for different purposes. Past Carta analysis found that fundraising valuations are typically three times the 409A.

Understanding the distinction is key to managing your equity correctly and communicating clearly with your team and investors.

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Equity valuations in the UK

If your company operates in the U.K., you will also encounter specific HMRC valuations, which are part of a regulatory environment where firms are expected to use disciplined methodologies to produce fair and reliable appraisals. Understanding the differences between 409A vs. HMRC company valuations is key, but both establish a compliant value for tax purposes.

How to get an audit-ready, accurate valuation

Valuation isn't a one-time event. It's a recurring part of the startup journey, from your first fundraise to hiring your team and planning for an exit, such as an initial public offering (IPO). Understanding your company's value is key to making strategic decisions at every stage.

The traditional valuation process can be a major headache for founders. It often involves chasing down documents, wrestling with error-prone spreadsheets, and waiting weeks for a report, all while you're trying to run your business. This manual process is not only slow but also introduces the risk of costly errors.

Carta offers a modern way to handle valuations. By connecting directly to your cap table (the single source of truth for your company's equity), our cap table management software streamlines the entire workflow. This integration allows us to deliver fast, accurate, and defensible 409A valuations and provides specialized equity management for LLCs without the administrative burden.

Our software is supported by a team of experienced valuation analysts who are there to help you through the process. Our equity management software handles everything from cap table management to 409A valuations and compliance, making things much easier for you and your team. This unified approach makes certain that your valuation is always based on the most up-to-date and accurate ownership data.

When you're ready to get a fast, audit-ready valuation, request a demo to see how Carta can help you start managing equity like a pro.

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Frequently asked questions about private company valuations

Is a business worth three times its profit?

While simple rules of thumb exist, a real valuation is far more nuanced. The final number depends heavily on your industry, growth rate, market volatility, business fundamentals, and other factors that simple multiples don't capture.

What is a good valuation multiple for a startup?

There is no single number for a good multiple, as it depends entirely on your industry, stage of growth, and financial performance. The best approach is to look at comparable companies in your sector and understand the industry average for relevant multiples.

How do you value a company with no revenue?

For pre-revenue companies, valuations focus more on qualitative factors. These include the strength and experience of the founding team, the size of the market opportunity, and any traction with an early product version.

How does revenue or profitability affect my valuation?

Higher revenue and profitability generally increase your valuation because they demonstrate business viability and reduce investor risk. Low or negative figures may lower your valuation or require justification through growth potential.

How do investors assess risk when valuing my company?

Investors assess risk by evaluating factors like market size, competition, business model, team experience, financials, and growth potential. Higher perceived risk typically results in a lower valuation.

Can I negotiate my company’s valuation with investors?

Yes, you can negotiate your company’s valuation with investors. Valuation is often a result of discussions and agreement between founders and investors during the fundraising process.

Why do different investors give me different valuations?

Different investors give you different valuations because they have varying risk tolerances, investment strategies, market perspectives, and expectations for your company's future growth and potential returns.

Why is my 409A valuation so much lower than my fundraising valuation?

The difference exists because 409A valuations determine the FMV of common stock, while fundraising valuations are based on the price of preferred stock, which has more favorable terms and extra rights like liquidation preferences. Historically, fundraising valuations have been significantly higher; for example, a 3X a 409A valuation.