Metrics & Performance
Buildup Method
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.
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