Valuation Methods: 44 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

Valuation methods are the frameworks analysts use to estimate what an early-stage company is worth, from discounted cash flow and the cost approach to venture-specific adjustments. The terminology covers the inputs to a discount rate, such as beta, CAPM, and the cost of equity, along with structural concepts like enterprise value and the circularity problem that arises when value depends on the financing being priced. Because startup valuation often blends several methods, fluency in this vocabulary supports comparing one estimate against another, a skill developed in the free Entrepreneurial Finance course.

These terms are taught in Week 5: Valuation Methods for Startups of the free Entrepreneurial Finance course; the full course glossary collects every chapter in one place.

Adjusted net asset method: Restates all assets and liabilities to fair market value; equity equals adjusted assets minus adjusted liabilities.
Adjusted Present Value (APV): Myers (1974): value the firm unlevered, then add the present value of the tax shield. Avoids WACC and its circularity.
After-tax cost of debt: The stated interest rate times (1 − tax rate). The interest tax shield lowers the true cost.
Anti-dilution: Protection in a down round. Full-ratchet reprices the whole prior round; weighted-average adjusts proportionally.
Beta: Sensitivity to market movements. For private firms, use unlevered betas of comparable public firms, then re-lever.
CAPM: Capital Asset Pricing Model (Sharpe, 1964; Lintner, 1965): cost of equity = risk-free rate + beta × equity risk premium.
Circularity problem: WACC needs the market value of equity, which the DCF is solving for. Resolved by iteration, a target structure, or APV.
Control premium: The extra a buyer pays for control of strategy and operations, embedded in precedent transactions.
Cost approach: Values a business at the cost to reproduce or replace its net assets. A floor for operating companies.
Cost of equity: The return equity investors require. Estimated with CAPM or a multi-factor model.; WACC vs Cost of equity Free Cash Flow to the Firm (FCFF) vs Free Cash Flow to Equity (FCFE)
Discounted cash flow (DCF): Projects free cash flows, discounts them at a risk-adjusted rate, and sums them to a present value.
Enterprise value: The value of the whole firm, debt and equity. FCFF discounted at WACC yields it.; WACC vs Cost of equity Enterprise value vs Equity value
Equity risk premium (ERP): The excess return investors demand over the risk-free rate. Damodaran's implied ERP was 4.23% as of January 2026.
Equity value: The value to shareholders. Enterprise value minus net debt, or FCFE discounted at the cost of equity.; WACC vs Cost of equity Enterprise value vs Equity value
EV / EBITDA: Enterprise value over EBITDA. The workhorse multiple for profitable firms; neutralizes capital structure and tax.
EV / Revenue: Enterprise value over revenue. Preferred for high-growth, not-yet-profitable firms.
Exit multiple method: Estimates terminal value by applying a market multiple (EBITDA or revenue) to the final-year metric.
Fama-French three-factor model: Fama and French (1993) added a size factor (SMB) and value factor (HML) to CAPM's market factor, improving explanatory power.
Football field chart: A horizontal bar chart of the value range from each method. The negotiated price usually sits in the overlap zone.
Gordon Growth Model: Gordon (1962): terminal value = FCF_n × (1 + g) / (WACC − g), treating cash flows as a growing perpetuity. Requires g < WACC.
Income approach: Values a business as the present value of expected future cash flows. DCF and the VC method are the primary tools.
Internal rate of return (IRR): The discount rate that sets NPV to zero. Intuitive, but assumes interim cash reinvests at the IRR.; IRR vs MIRR
Liquidation value: What assets fetch in a quick, distressed sale, often 50 to 70% of fair value for tangibles, near zero for intangibles.
Market approach: Values a business by reference to what similar firms sell for, via trading comps or precedent transactions.
Modified IRR (MIRR): Compounds inflows at a reinvestment rate and discounts outflows at a finance rate, giving one unique, realistic return.; IRR vs MIRR
Multiple-IRR problem: When cash flows change sign more than once, the IRR equation can have several valid solutions.; IRR vs MIRR
Net debt: Total debt minus cash. Subtracted from enterprise value to reach equity value.; Enterprise value vs Equity value
NOPAT: Net operating profit after tax: EBIT × (1 − tax rate). Strips out interest, since FCFF is pre-financing.
Option pool: Shares reserved for employees, often 10 to 20%, frequently created pre-money and diluting existing holders.; Pre-money valuation vs Post-money valuation
Perpetuity growth rate (g): The forever growth rate in the Gordon model, near long-run nominal GDP, 2 to 3%. Above 4% is indefensible.
Post-money valuation: Terminal value divided by (1 + target return) to the n. Company value including the new investment.; Pre-money valuation vs Post-money valuation
Pre-money valuation: Post-money minus the investment amount. Company value before the new money.; Pre-money valuation vs Post-money valuation
Precedent transactions: Multiples paid in completed acquisitions. Include a control premium of roughly 20 to 40%.
Pro-rata rights: The right to invest in future rounds to maintain ownership, improving the retention ratio at the cost of more capital.
Probability-weighted valuation: Assigns probabilities to multiple scenario values and takes the expected value, including a failure scenario at zero.
Retention ratio: The fraction of ownership expected to survive future dilution. Required current ownership = final ownership / retention ratio.
Risk-free rate: The yield on a government bond matching the cash-flow horizon, often the 10-year Treasury.
Size premium: The extra return small firms have historically earned. Add roughly 2 to 6% for a small private company.
Stage-adjusted discount rate: A different rate for each year, reflecting that risk resolves as milestones are reached (Bhagat, 2014).
Target return: The VC's required annual return, which embeds portfolio failure probability. Used instead of WACC.
Trading comparables: Valuation multiples of similar public companies. Price minority stakes; exclude the control premium.
Triangulation: Computing value by several methods and presenting a range. Tight convergence signals confidence; wide divergence signals a wrong assumption.
VC method: Sahlman (1987): work backward from a target exit value at the investor's required return to derive today's price.
WACC: Weighted average cost of capital: (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate).; WACC vs Cost of equity Free Cash Flow to the Firm (FCFF) vs Free Cash Flow to Equity (FCFE)Enterprise value vs Equity value

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