Equity Compensation in Venture Capital and Private Equity

Portfolio companies of private equity and venture capital funds often provide equity-based compensation to employees. Certain forms of equity compensation, such as stock options, profits interests, or appreciation rights, are directly tied to changes in equity value. When it comes to valuation of equity compensation in privately-owned companies, the Option Pricing Method (OPM) Backsolve method can be useful for companies with a complex capital structure with multiple classes of equity. A primary advantage of this method is that it establishes a value for equity compensation based on the support of the latest round of financing or transaction.