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Accounting and Valuation Guide: Valuation of Privately-Held-Company Equity Securities Issued as Compensation


This new Guide has been developed by AICPA staff and the Equity Securities Task Force and is the first in a series of 3 NEW AICPA Accounting Valuation Guides to be released. This long anticipated release reflects best practices developed over the previous decade.

Since the issuance of FASB ASC 718 and 505-50 in 2004, valuing stock-based compensation ("cheap stock") has been a significant challenge for private companies. This New Guide has been designed to mitigate those challenges. It brings you practical guidance and illustrations related to accounting, disclosures and valuation of privately held company equity securities issued as compensation.

This guide includes:

  • Evaluating private and secondary market transactions -- What should companies do when transaction activity doesn't match their estimates of value?
  • Adjustments for control and marketability -- How should companies think about the value of the enterprise for the purpose of valuing minority securities? When is it appropriate to apply a discount for lack of marketability, and how should the estimated discount be supported?
  • Highly leveraged entities -- How should companies incorporate the fair value of debt in the valuation of equity securities? What is the impact of leverage on the expected volatility of various securities?
  • The relevance of ASC 820 (SFAS 157) to cheap stock issues
  • Updated guidance and illustrations regarding the valuation of, and disclosures related to, privately held company equity securities issued as compensation

This Guide also provides expanded and more robust valuation material to reflect advances in the theory and practice of valuation since 2004.

This edition includes guidance from FASB ASC 718, 505-50, 820-10 and SSVS 1 which were all issued since the last AICPA guidance dedicated to this issue.

Founded in 1887, the American Institute of Certified Public Accountants (AICPA) represents the CPA and accounting profession nationally and globally regarding rule-making and standard-setting, and serves as an advocate before legislative bodies, public interest groups and other professional organizations. The AICPA develops standards for audits of private companies and other services by CPAs; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and monitors and enforces compliance with the accounting profession’s technical and ethical standards.
The AICPA’s founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, a licensing status and a commitment to serving the public interest.
Introduction .01-.11

Background .04-.08

Scope .09-.10

Information Included in This Guide .11

1 Concepts of Fair Value of Equity Securities .01-.18

2 Stages of Enterprise Development .01-.05

3 Factors to Be Considered in Performing a Valuation .01-.19

4 Overview of Valuation Approaches .01-.55

Market Approach .05-.22

Significant Assumptions of the Market Approach .21-.22

Income Approach .23-.41

Significant Assumptions of the Income Approach .39-.41

Asset Approach .42-.55

Significant Assumptions of the Asset Approach .51-.55

5 Valuation of Equity Securities in Simple Capital Structures .01-.21

Fair Value of Debt for Purpose of Valuing Equity .10-.21

6 Valuation of Equity Securities in Complex Capital Structures .01-.54

Rights Associated With Preferred Stock .09-.13

Methods of Estimating the Fair Value of Multiple Classes of Securities .14-.16

Overall Comments Applicable to All Four Methods for Valuing Equity Securities .17-.20

Considerations Affecting the Selection of a Method for Valuing Equity Securities .21-.54

The PWERM .23-.29

The OPM .30-.41

The CVM .42-.47

Hybrid Methods .48-.54

7 Control and Marketability .01-.33

Controlling Versus Minority Interests .03-.15

Marketable Versus Nonmarketable Interests .16-.33

8 Inferring Value From Transactions in a Private Company’s Securities .01-.15

Chapter Paragraph

9 Relationship Between Fair Value and Stages of Enterprise Development .01-.10

10 Valuation Implications of a Planned Initial Public Offering .01-.10

11 Reliability of the Valuation .01-.20

Postvaluation Events .17-.20

12 Common Valuation Questions

Fair Value of Debt

Q&A 12.1: Using the Book Value of Debt in the Valuation of Minority Equity Securities

Q&A 12.2: Using the Traded Price of Debt in the Valuation of Minority Equity Securities

Q&A 12.3: Using the Zero Coupon Bond Equivalent for Including Debt in the Option Pricing Method

Estimating Equity Value Using the Fair Value of Debt

Q&A 12.4: Impact of Estimating Equity Value Using the Fair Value of Debt When Both the Enterprise Value and Fair Value of Debt Have Declined

Q&A 12.5: Impact of Estimating Equity Value Using the Fair Value of Debt When the Enterprise Value Has Remained Unchanged Valuing Equity Securities in Complex Capital Structures

Q&A 12.6: Current Value Method

Q&A 12.7: Fair Value of Securities Issued by Partnerships and Limited Liability Companies

Q&A 12.8: Treatment of Options in the OPM

Q&A 12.9: Fair Value of Securities in a Roll-Up Structure

Q&A 12.10: Discount Rate Used in the Probability-Weighted Expected Return Method

Q&A 12.11: Measuring Volatility for Early-Stage Companies Control and Marketability

Q&A 12.12: Marketability of Investor Interests

Q&A 12.13: Comparison Between the Fair Value of the Enterprise and the Value of the Enterprise Used for Valuing Minority Interests

Q&A 12.14: Applying Discounts for Lack of Marketability to the Total Equity Value

Q&A 12.15: Discounts for Lack of Marketability and Control When the Enterprise Has a Simple Capital Structure Information to Be Considered in the Valuation

Q&A 12.16: Postvaluation Event (Customer Financial Condition)--Assessment as Known or Knowable

Q&A 12.17: Postvaluation Event (Product Approval)--Assessment as Known or Knowable Chapter Paragraph

12 Common Valuation Questions--continued

Q&A 12.18: Expected Financing--Effect on Valuation Shelf Life of a Valuation

Q&A 12.19: Shelf Life of a Valuation

Q&A 12.20: Shelf Life of Value-Related Information

13 Elements and Attributes of a Valuation Report .01-.16

14 Accounting and Disclosures .01-.18

Accounting .01-.04

Existing Financial Statement Disclosure Requirements .05-.11

Recommended Financial Statement Disclosures for an Initial Public Offering .12-.13

Recommended Management’s Discussion and Analysis Disclosures in an IPO .13

Disclosure Example .14-.18

Background .16-.18


A The Initial Public Offering Process

B Venture Capital Rates of Return

C Criteria for the Selection of a Valuation Specialist

D Table of Responsibilities of Management and the External Valuation Specialist

E Table of Capitalization Multiples

F Derivation of Weighted Average Cost of Capital

G Real Options

H Rights Associated With Preferred Stock

I Illustration of Methods for Valuing Equity Securities

J Illustrative Document Request to Be Sent to Enterprise to Be Valued

K Illustrative List of Assumptions and Limiting Conditions of a Valuation Report

L Bibliography and Other References


Index of Pronouncements andOther Technical Guidance

Subject Index