What Is the OPM Backsolve Method? Definition and Examples

Most valuations start with the company and end with a price per share. The backsolve starts with a price per share and ends with the company. A company’s equity value is what is left for shareholders after debt. The option pricing method treats each share class as a call option on that value. A call option is a right that pays off only above a set price. Preferred stock has a liquidation preference, so common stock gets paid only after preferred has been covered. That is the same shape as an option.

1. 01
   Take the latest roundThe appraiser starts from the price and terms of a recent financing in the company’s own stock. The SEC letter describes the equity value as derived from a recent transaction in the company’s own securities.
2. 02
   Map the rightsEach class has a liquidation preference and conversion rights. These create breakpoints, the equity values at which a new class starts to share in the proceeds.
3. 03
   Choose the inputsThe model needs the time to a sale or IPO, the risk-free rate, which is the return on a safe government bond, and volatility, the range in which the value is assumed to swing.
4. 04
   Solve backwardThe appraiser changes the total equity value until the model prices the new class at exactly what investors paid. That value is the answer. This step is the “backsolve.”
5. 05
   Price the other classesWith that equity value fixed, the same model gives a value for each other class, including common stock.
6. 06
   Adjust for marketabilityCommon shares cannot be sold freely. The appraiser usually applies a discount for lack of marketability to reach the final common value.

Why Do Appraisers Use the Backsolve?

A recent round is a price that a real investor paid in a negotiated deal. The tax rule lists recent arm’s-length transactions among the factors for a reasonable valuation. An arm’s-length deal is a sale between unrelated parties. The method fits companies with a fresh round and no visible exit date. When exits can be named, appraisers look at PWERM or a mix of both.

The company below is invented. It has 35,000,000 common shares, 10,000,000 Series A preferred shares sold at $2.00 and 5,000,000 Series C preferred shares sold at $10.00 in the latest round. Both preferred series have a 1x preference that does not participate beyond it, and they rank equally.

These rights create four breakpoints: $0, $70M, $140M and $500M of equity value. Below $70M, only the preferred shares get paid. Between $70M and $140M, common stock alone shares until it reaches $2.00 a share. Between $140M and $500M, common and Series A share. Above $500M, all classes share. The model uses three invented assumptions: 60% volatility, three years to a sale and a 4% risk-free rate.

The appraiser then searches for the equity value at which the model prices a Series C share at $10.00. In this example, that value is $296.5M. The same model prices the other classes.

The assumptions matter. Change the time to a sale and the answer moves.

• A stale roundUnder the tax rule, a value calculated for a date more than 12 months earlier is not reasonable. A round that is old, or a company that has changed since, needs an adjustment. In the SEC letter, no roll-forward adjustment was needed because the round had closed five days before the valuation date.
• A price that carries extrasThe round price may include rights beyond a plain preference. It may also reflect a deal with a related party. Treating it as a clean market price overstates what common stock is worth.
• Sensitive inputsThe example shows it. Moving the time to a sale from two to four years moves the common value from $5.10 to $5.71. Volatility and the preference terms matter as well.
• The marketability discountIt is a judgment, and it moves the final number as much as the model does.
• False precisionThe output looks exact to the cent. The inputs are estimates.

The method is not a legal requirement. The Treasury regulation names no method. It asks for a reasonable one, applied reasonably, and an independent appraisal within 12 months is presumed reasonable. The IRS can rebut the presumption only by showing the method or its use was grossly unreasonable. The full test is on the 409A valuation page.

For an option holder, the output often sets the strike price, the price you pay per share when you exercise. A lower common value means a lower strike for new grants. It does not change what your shares are worth if the company sells for a high price. The difference between common and preferred is explained in common vs preferred stock.

For an investor, the backsolve shows that a round price is a statement about one class of stock. Multiplying that price by every share does not give the company’s value. It also shows why the same company can carry two prices at once. The preferred price comes from the round. The common price comes from the model.

Common Mistakes

• Reading the output as the company’s valueIt allocates one value across the classes. No buyer has offered that value for the whole company.
• Using a round that is too oldA value older than 12 months does not meet the tax rule’s standard.
• Comparing a common value to the preferred priceThe two classes have different rights. A gap between them is expected.
• Skipping the discountCommon shares cannot be sold freely, and the appraiser must address that.
• Treating the model as a forecastIt describes a range of outcomes. It does not predict the exit price.

OPM backsolve

A valuation method that solves for the equity value at which an option pricing model reproduces the latest financing price, then values the other share classes.

Option pricing method

A method that treats each share class as a call option on the company’s equity value.

Breakpoints

The equity values at which a new share class starts to share in the proceeds.

Volatility

The range in which the company’s value is assumed to swing over the period.

Liquidation preference

The right of preferred stock to be paid first in a sale.

DLOM

Discount for lack of marketability. A reduction in value because shares cannot be sold freely.

409A valuation

An independent appraisal of a private company’s common stock for option grants.

PWERM

A method that values shares by weighting a few modeled exits by their likelihood.

Figures were last checked on October 13, 2026. Rules are cited for the United States. The AICPA guide’s own text on the backsolve could not be opened, so this page describes the method from the SEC filing and the tax regulation. The sibling page PWERM covers the guide’s other methods.