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Valuing the Early-Stage Company

This note covers several frequently used methods to value early-stage companies and discusses some of the issues and difficulties encountered more generally in valuing privately held assets. The basic assumptions underlying the venture-capital and the discounted-cash-flow methods of valuation are discussed in detail. In addition, the note attempts to provide some direction in making the appropriate trade-offs between the guidance provided by financial theory and the practical limitations posed by an illiquid-asset class. The note provides a numerical example to highlight the key differences between the techniques.