If you're an employee with stock options, an investor considering a startup, or a founder trying to raise money, you've probably stared at a share price and wondered: where did this number come from? Unlike public companies where the price flashes on a screen based on buyer and seller bids, a private company's share price is a negotiated, calculated, and sometimes controversial figure. It's not set by a free market day-to-day. It's determined through a mix of financial analysis, market comparisons, strategic negotiation, and legal compliance. Getting this wrong can cost employees money, scare off investors, or even trigger tax problems.

Let's cut through the jargon. The price per share for a private company is essentially the company's valuation divided by its total number of shares outstanding. The real question is: how do you get to that valuation? That's where the art and science collide.

What's Inside This Guide

The Three Core Valuation Methods Explained

Valuation professionals and venture capitalists don't just pick a number out of thin air. They rely on established methodologies. The trick is knowing which one to use and when.

1. The Market Approach (Comparable Company Analysis)

This is the most common method for early to growth-stage startups. The logic is simple: if a similar company sold for X, then our company might be worth something close to X. You look at recent acquisitions or funding rounds of companies in your same sector, stage, and geography.

You find metrics like:
Revenue Multiple: A SaaS company might be valued at 10x its annual recurring revenue (ARR).
User Multiple: A social media app might be valued per monthly active user.
EBITDA Multiple: More common for mature, profitable private companies (EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization).

You then adjust up or down based on your growth rate, margins, team strength, and market position. This method is highly sensitive to market sentiment. In a hot market, multiples inflate. In a downturn, they collapse.

2. The Income Approach (Discounted Cash Flow Analysis)

The DCF model is finance textbook classic. You forecast the company's future free cash flows and then "discount" them back to today's value using a required rate of return (the discount rate). The higher the risk, the higher the discount rate, and the lower the present value.

Sounds precise, right? Here's the expert secret everyone glosses over: for most early-stage startups, a DCF is practically guesswork. The model is only as good as its assumptions—projections five years out for a company that's just found product-market fit are wildly speculative. The discount rate for a pre-revenue biotech startup is more art than science. While investment banks use it for later-stage deals, many VCs find it less useful for early-stage investing where the future is too fuzzy. It's often used as a sanity check alongside the market approach.

3. The Asset Approach (Cost to Recreate)

This method values a company based on the net value of its assets minus its liabilities. It's straightforward for a holding company or a business with lots of physical assets (like a manufacturing plant). For a technology startup whose main assets are code and people? It's almost useless. You can't put a reliable balance sheet value on intellectual property or a talented team. This method usually sets a floor value, especially if a company is being liquidated.

Here’s a quick comparison of when each method is typically most relevant:

Valuation Method Best For Key Inputs Biggest Limitation
Market Approach (Comparables) Early & Growth-Stage Startups, Fundraising Rounds Recent deal comps, Revenue/User metrics, Market sentiment Requires good comparable companies; highly market-dependent
Income Approach (DCF) Mature, Profitable Companies; Later-Stage Rounds Financial projections, Discount rate (risk), Terminal value Highly sensitive to long-term assumptions; unreliable for early stages
Asset Approach Asset-Heavy Businesses, Holding Cos., Distressed Sales Balance sheet assets, Liabilities, Fair market value of assets Undervalues intangible assets (IP, brand, team)

What Actually Drives the Price Up or Down?

The method gives you a framework, but these are the real levers that move the needle during a negotiation.

Traction is King (or Queen): Consistent, growing revenue is the single biggest driver. Recurring revenue (like subscriptions) is valued more highly than one-off sales. User growth, engagement metrics, and a low churn rate are critical for consumer apps.

The Team and Execution: A seasoned team that has built and sold companies before can command a premium. Investors are betting on the jockey as much as the horse.

Market Size and Momentum: Are you in a hot space like AI? Expect a higher multiple. A shrinking or niche market will depress valuation. Reports from firms like PitchBook or CB Insights track these sector trends.

Terms, Not Just Price: This is a crucial nuance. A higher share price isn't always better if it comes with brutal terms. Liquidation preferences (which get investors paid first), anti-dilution provisions, and board control can significantly affect the real economic value of common shares, even if the nominal price is high.

Supply, Demand, and FOMO: If multiple investors are competing for a limited allocation in your round, the price will go up. A cold fundraising market with cautious investors will push it down. It's simple economics.

The Employee Stock Options Price (409A Valuation)

This is a specific, legally-required price that often confuses employees. In the US, the IRS requires private companies to get an independent 409A valuation to set the "fair market value" (FMV) of their common stock, which becomes the exercise price for employee stock options.

Why does this matter for you?

If the 409A price is set too low, the IRS could deem the options as granting immediate income, creating a tax bill for employees when they receive them—a disaster. So, companies are incentivized to be conservative.

The Big Disconnect: The 409A price for common shares is almost always lower than the price paid by VCs for preferred shares in the latest funding round. Why? Preferred shares have special rights (liquidation preference, dividends) that make them more valuable. The 409A valuation applies a discount for this lack of rights and for the fact that common stock is illiquid (you can't easily sell it). This discount can be 20-40% or more.

So, don't look at the headline Series B valuation and divide by shares to guess your option price. It won't match. The 409A is a separate, formal appraisal conducted by a third-party firm.

The Funding Round Price (Priced Equity Round)

This is the price you hear about in TechCrunch headlines: "Company X raises $50M at a $250M valuation." This price is for newly issued preferred shares sold to investors (VCs, angels).

It's the result of intense negotiation between the company and the lead investor. They agree on a pre-money valuation (the company's value before the new cash comes in). The investment amount is then added to get the post-money valuation.

Price per Share = Pre-Money Valuation / Total Pre-Money Shares Outstanding.

This price anchors the company's worth until the next round. It directly sets a higher bar for the next 409A valuation and creates a reference point for any secondary sale of shares.

Common Mistakes and Misconceptions to Avoid

  • Mistaking Valuation for Cash in the Bank: A $100M valuation doesn't mean the founders have $100M. It's a paper value. Turning shares into cash requires a liquidity event (acquisition, IPO, secondary sale).
  • Ignoring Liquidity Discount: Your private shares are worth less than identical public shares because you can't sell them easily. This illiquidity discount is real and often ignored by employees until they try to sell.
  • Over-relying on a Single Method: A good valuation triangulates using multiple methods. Basing everything on wildly optimistic DCF projections is a red flag.
  • Not Reading the Fine Print (Liquidation Preference): A "1x non-participating" preference is standard. A "2x participating" preference means investors get double their money back off the top and then share in the remaining proceeds. This can leave common shareholders with nothing in a modest exit, even if the headline valuation was high.

I've seen companies with great headline valuations fail to deliver returns to employees because the capital structure was stacked against common stock. The price per share is just one number in a much more complex story.

Your Private Share Price Questions Answered

As an employee, how can I tell if my stock option strike price is fair?
First, ask the company for the summary report of the latest 409A valuation. Reputable companies will share this. Check the valuation date—it should be recent (within the last 12 months, or after any major company event). Then, compare the 409A price to the latest preferred share price from the funding round. There should be a meaningful discount (that 20-40% range). If the 409A price is suspiciously close to or even at the preferred price without a strong justification, it could be aggressive and risk future IRS issues. Your real concern should be the company's growth potential, not just the current strike price.
Can a private company share price go down after a funding round?
Absolutely, and it happens more often than people talk about. It's called a "down round." If a company raises a new round of funding at a lower price per share than the previous round, the share price has officially gone down. This dilutes existing shareholders (including employees) significantly and is a major red flag about the company's performance or market conditions. Terms like "structured rounds" or "pay-to-play" provisions often accompany down rounds to protect new investors.
Who has the final say in setting the share price during a funding round?
It's a negotiation, but the lead investor typically sets the price term sheet. They have the leverage of the checkbook. The company's board of directors (which includes investor representatives and founders) must ultimately approve the round and its terms. For a 409A valuation, the final say is with the independent appraisal firm, though the company's finance team provides them with the necessary data and assumptions.
How do secondary market sales (like SharesPost or Forge) affect the official share price?
Secondary sales create a real, albeit thin, market price for private shares. These transactions are closely watched. If employees or early investors are consistently selling shares at a price below the last 409A or preferred price, it's a strong signal that the official valuations may be too high. Many 409A valuation firms will now incorporate data from secondary market platforms into their analysis, using it as a market-based data point to support or adjust their conclusion.
What's the one thing founders most often get wrong about setting their company's valuation?
Chasing the highest possible headline valuation. An inflated price sets unrealistic expectations for future growth, makes it harder to raise the next round (you have to grow into that valuation), and can lead to harsh terms if you miss targets. It's better to raise at a fair, reasonable valuation with supportive investors than to maximize price with investors who will turn on you at the first stumble. A moderate valuation that you can confidently beat is a strategic advantage.