VC & PE Glossary
What Is Fair Value?
Updated
Definition
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date—used to mark private holdings on fund books.
Useful for: Founders, Investors
Fair value is the estimated exchange price for an asset in an orderly, arm’s-length sale at the measurement date— the standard funds and auditors use to mark private company stakes between transaction events.
How it works
Under U.S. GAAP (ASC 820), fair value hierarchy favors observable market prices, then comparable company inputs, then model-based techniques. Venture funds mark each portfolio company quarterly: unchanged if no new info, adjusted for down rounds, secondary trades, or material KPI changes. GPs document methodology for LP reporting and paper gain tracking.
Startups encounter fair value through 409A appraisals setting common stock strike prices for options—distinct from preferred round price but conceptually related. Public comparables, recent financing, and milestones feed both processes. Fair value is not the same as fair market value in all tax contexts, though practitioners often align them.
Illiquid stakes require judgment; identical companies can receive different marks from different holders in the same quarter.
Why it matters
- Founders: Option grants and secondary approvals reference fair value; surprises hit when 409A rises after a big preferred round, shrinking employee upside on old grants.
- Investors: Marks drive fund TVPI and LP statements; aggressive marking inflates fundraising track records until DPI catches up.
Common mistake
Treating last round price as permanent fair value. Without new equity pricing support, auditors often require write-downs when performance misses plan.
Related ideas
See paper gain, 409A, ASC 820, and benchmark multiples.
Related terms
- Benchmark — In venture capital, Benchmark most often refers to Benchmark Capital, a prominent early-stage VC firm — or, in general usage, a standard for comparing performance, valuation, or operating metrics against peers.
- Paper Gain — A paper gain is an unrealized increase in the value of an investment on paper—marked up in a portfolio or cap table but not yet converted to cash through a sale, IPO, or secondary.
Common questions
Short answers for founders, LPs, and operators