IRC 409A Common Stock Valuation
This free, guided checker walks your team through the key decision points for IRC 409A Common Stock Valuation. Answer a few questions to see the likely approach and the evidence to document.
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Allocating Equity Value Across Share Classes
This free, guided checker walks your team through the key decision points for Allocating Equity Value Across Share Classes. Answer a few questions to see the likely approach and the evidence to document.
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This tool is a high-level valuation screening aid for general information only and is not a valuation, appraisal, accounting, tax or legal opinion. A defensible conclusion of value requires a qualified valuation specialist applying professional standards to entity-specific evidence.
The questions this tool walks you through
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
Does the company have more than one class of equity with different economic rights (for example preferred stock with a liquidation preference, participation, or conversion, alongside common stock, options, or warrants)?
Allocation is only needed when classes differ in liquidation preference, participation, seniority, conversion, or embedded options. List every class and its rights first; the common trap is treating convertible preferred as if it always converts, which ignores the preference that governs at lower equity values.
Value each unit as its pro rata share of total equity; no allocation model is required for a single economic class.
Official guidance: FASB Accounting Standards Codification
How close is the company to a liquidity event, and how well can its outcomes be characterized as of the measurement date?
Method selection is driven by proximity to and predictability of a liquidity event, not by preference. An imminent, known event favors the current value method; a few estimable outcomes favor the probability-weighted method; a remote or continuous future favors option pricing; a mix favors a hybrid. The trap is defaulting to one method for every stage rather than matching the model to the facts.
Screen the current value method: measure each class by its rights in the known near-term event. Screen the probability-weighted expected return method: confirm the outcomes can be estimated. Screen the option pricing method and whether a recent financing calibrates the total value input. Screen a hybrid of probability-weighted outcomes and option pricing.
Official guidance: FASB Accounting Standards Codification
Are the proceeds payable to each class in that near-term event substantially fixed and knowable as of the measurement date?
The current value method assumes the liquidity event happens today with known proceeds, so it ignores the time value and volatility carried by the option each class holds between its preference and its as-converted value. Use it only when an exit is imminent and terms are set; applying it to an early-stage company understates common stock by ignoring the option-like upside of the conversion decision.
Apply the current value method: allocate current equity value by each class's rights as if the event occurred at the measurement date. Treat the outcomes as discrete scenarios and screen the probability-weighted method.
Official guidance: FASB Accounting Standards Codification
Can you identify a small set of discrete future outcomes and reasonably estimate the equity value, timing, and probability of each?
The probability-weighted method builds an explicit waterfall for each scenario, discounts each to present value, and weights by probability, so it is only as good as the scenario inputs. Reserve it for later-stage companies with visible paths to exit; forcing discrete scenarios onto a very early-stage company invites unsupportable probability and value assumptions.
Confirm whether any scenario needs option pricing within it, which distinguishes a hybrid from a pure probability-weighted method. Screen the option pricing method and whether a recent financing calibrates the total value input.
Official guidance: FASB Accounting Standards Codification
Was there a recent, arm's-length financing in the company's own equity at or near the measurement date?
ASC 820 calibration requires that a technique using unobservable inputs reproduce a recent transaction price at initial recognition. A recent priced round is often the strongest evidence of total equity value; the trap is using the headline post-money figure directly, because the preferred price reflects preferences that a backsolve must strip out to allocate value across the classes.
Assess whether the financing is reliable enough to calibrate a backsolve. Apply a forward option pricing method using a total equity value derived from market or income approaches.
Official guidance: FASB Accounting Standards Codification
How well does that financing support the total equity value input as of the measurement date?
A backsolve solves for the total equity value that makes the option pricing model reproduce the price paid in the round, which embeds the market's view of value and volatility. Test the round for arm's-length pricing, timing, and any special rights; anchoring a backsolve to a non-arm's-length or stale round imports a value that ASC 820 calibration is meant to prevent.
Backsolve for total equity value from the round price using an option pricing model calibrated to that transaction. Backsolve and then calibrate the result forward for changes in value and volatility since the round. Set the round aside and derive total equity value from market or income approaches, then apply the option pricing method.
Official guidance: FASB Accounting Standards Codification
Within the probability-weighted scenarios, does at least one scenario (typically staying private) itself require allocating a future equity value across classes under continuous uncertainty?
The hybrid method reserves option pricing for the one scenario - usually staying private - where classes keep their conversion optionality, and treats near-term IPO or sale outcomes as determinate waterfalls. Decide this scenario by scenario; using a pure waterfall for a stay-private scenario understates common by ignoring the optionality that the option pricing method captures.
Apply a hybrid: option pricing within the continuing scenario, probability-weighted with the discrete outcomes. Apply the probability-weighted expected return method across the discrete outcomes.
Official guidance: FASB Accounting Standards Codification
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