Rethinking Fair Value in Venture Capital

Fair value in venture capital evolves throughout the lifecycle of an investment, and so should the valuation methodology.

In practice, there are three distinct stages:

🔹 At Investment Valuation is typically anchored to the transaction price, often supported by an OPM back-solver to allocate value across share classes.

🔹 Towards Exit (no expectation of future financing rounds) Dependent on expected time to exit, methodologies range from CVM, OPM, PWERM and Hybrid.

🔹 The “In-Between” Stage (Most Challenging) When a company hasn’t raised a new round for some time yet there is an expectation of future funding, this is where fair value becomes less straightforward, and more judgment-driven.

To properly tackle this challenging middle stage, we need to go back to fundamentals. Under IPEV / ASC 820, fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (IPEV §1.1), assuming a hypothetical transaction in the principal or most advantageous market (IPEV §1.2).

In this middle stage, that hypothetical transaction would not be a full company sale, but rather another financing round. This distinction, of whether the next transaction would be an exit or a new round, is critical.

What a Financing Round Actually Represents

In a financing round:

• There is a new investment into the company, introducing fresh capital

• This dilutes existing shareholders

• The new shares typically come with top-tier rights and protections (e.g., liquidation preferences, seniority), often making them economically different from earlier rounds

• The transaction price per share reflects a negotiated outcome between informed market participants

• That price fully embeds their rights and preferences

As a result, different share classes have different economic values, despite sitting in the same cap table.

This is why we cannot simply derive enterprise value by multiplying the latest share price by total shares outstanding. That approach ignores dilution dynamics and the asymmetric rights embedded in different securities.

Instead:

✅ The latest round price should serve exclusively as the observable transaction anchor 

✅ That price should be used within an OPM back-solver framework 

✅ The back-solver then allocates value across share classes, taking into consideration the different rights of different class

A Practical Lens (Aligned with IPEV / ASC 820)

Fair value assumes a transaction between market participants (IPEV §1.1). In VC, this concept is nuanced.

✅ What VCs bring to the table:

• Deep market insight

• Active role in structuring financings

• Firsthand knowledge of comparable transactions

At entry, this positions VCs as credible market participants.

VC = Probability/Optionality, Not Traditional Equity

VC investing behaves more like a portfolio of options than traditional equity:

• Many investments fail

• A small number generate outsized returns

This probability/optionality is why IPEV discusses using OPM and PWERM for valuation (IPEV, page 40).

What Goes Wrong in the Middle Stage

When no new round exists, VCs tend to rely on:

• Mark-to-market comparisons

• Multiples-based enterprise value

• Waterfall allocations

However, these often:

❌ Treat all shares as economically identical

❌ Ignore embedded preferences

❌ Drift away from how actual market participants price transactions

 A More Consistent Approach

A more defensible framework:

👉 Assumes a hypothetical financing round as the transaction event 

👉 Uses milestones and calibration (as outlined in IPEV, page 43) to determine both the investment amount and share price for that round

👉 Ensures this reflects what would realistically occur in an actual market transaction

This is critical: The hypothetical round should mirror a real financing, including dilution effects and investor rights, not be an abstract construct.

✅ The resulting transaction price becomes the anchor 

✅ That price is then used in an OPM back-solver calculation, to allocate value across the capital structure

Simply selecting a share price or worse, an enterprise value, without calibrating the implied investment and round dynamics can materially distort the valuation. It breaks the linkage to how markets actually function and can skew results, particularly when rights and preferences are significant.

Bottom Line

A robust VC fair value framework - particularly in the middle stage where no new funding round has occurred and the most likely next event is a future fundraise - should:

• Anchorto transaction price—not simplistic EV calculations

• Recognize that share classes are not economically equivalent

• Incorporate realistic dilution, rights, and capital structure dynamics

• Use calibrated, milestone-based assumptions for hypothetical rounds

• Reflect the option-like nature of VC investing throughout the lifecycle

Done right, it is:

✅ Compliant ✅ Grounded ✅ Defensible

Disclaimer: This is a general perspective and not a substitute for tailored valuation advice. Specific facts and circumstances may require different approaches.