Metrics & Performance
Last updated
Quick Answer
A valuation approach that calculates required return by adding risk premiums for each layer of investment risk.
The buildup method starts with a risk-free rate and adds premiums for equity risk, size risk, industry risk, and company-specific risk to arrive at a required rate of return. This is commonly used in 409A valuations for early-stage companies.
In Practice
Risk-free rate (4%) + equity premium (6%) + small company premium (4%) + startup-specific risk (15%) = 29% required return, implying a significant discount to recent round pricing.
Why It Matters
Understanding valuation methodologies helps founders and employees interpret 409A valuations and understand why the IRS-approved value is typically much lower than the last round price.
VC Beast Take
The buildup method is how accountants arrive at a number everyone already knows is wrong, but that satisfies the IRS.
The buildup method starts with a risk-free rate and adds premiums for equity risk, size risk, industry risk, and company-specific risk to arrive at a required rate of return. This is commonly used in 409A valuations for early-stage companies.
Understanding Buildup Method is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Buildup Method falls under the metrics category in venture capital. This area covers concepts related to the quantitative measures used to evaluate fund and company performance.
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