The Three Core IPEV (ASC 820) Valuation Methodologies for VC‑Backed Companies

In previous posts, I’ve focused on what not to use when valuing early‑stage, venture‑backed companies under IPEV and ASC 820. We’ve covered why last price per share, cost, and inappropriate use of waterfall allocations often fail to meet fair value requirements, especially when capital structures are complex or when market conditions and company performance have shifted since the last financing. Those approaches may feel intuitive, but they rarely reflect the economics a market participant would consider today.

Now it’s time to pivot toward what can be used. IPEV highlights three methodologies that are particularly relevant for venture‑backed companies: the Probability‑Weighted Expected Return Method (PWERM), the Option Pricing Method (OPM), and the Current Value Method (CVM). Each brings a different lens to the valuation challenge. PWERM models discrete future outcomes, OPM uses option‑theory principles to allocate value across the cap table, and CVM allocates today’s enterprise value across the capital structure as if a liquidity event occurred right now.

Understanding when and why each method is appropriate is essential for producing valuations that are technically sound, defensible, and aligned with the requirements of IPEV and ASC 820.

Probability‑Weighted Expected Return Method (PWERM)

PWERM builds valuation from a set of discrete future scenarios of various possible exits values or even dissolution, each with its own probability and payout. By discounting those scenario‑specific equity values back to the present, PWERM captures the inherent uncertainty of early‑stage investing while grounding the valuation in realistic exit paths. It’s especially effective when management and investors have a clear view of potential milestones and their likelihood, allowing qualitative insights to be translated into a structured quantitative framework.

Where PWERM excels is in its transparency. It forces explicit articulation of assumptions, probabilities, and payout mechanics across the capital structure. This makes it particularly useful for companies with complex preferences or multiple share classes, where outcomes can diverge dramatically depending on the scenario. The challenge, of course, is that PWERM can become subjective if probabilities aren’t rigorously justified. But when applied with discipline, it provides a valuation that mirrors how investors actually think about risk and reward.

Option Pricing Method (OPM)

The Option Pricing Method treats each share class as a call option on the company’s equity value, with strike prices defined by liquidation preferences and conversion thresholds. Instead of relying on discrete scenarios, OPM assumes a continuous distribution of potential enterprise values and uses option‑theory principles to allocate value across the cap table. This makes it particularly powerful when the timing and nature of a liquidity event are uncertain, which is often the case between financing rounds.

OPM’s strength lies in its objectivity and mathematical consistency. It handles complex capital structures elegantly, especially when multiple preferred classes sit at different points in the payout waterfall. However, because it assumes a smooth distribution of outcomes, it may not fully capture binary or milestone‑driven value inflections. Still, for many venture‑backed companies, OPM remains one of the most robust and defensible methods under IPEV and ASC 820, particularly when no single scenario stands out as clearly more likely than others.

Current Value Method (CVM)

The Current Value Method (CVM) values the company based solely on its current state: its present financial position, capital structure, and rights/preferences as they stand today, without projecting future scenarios or assuming value‑creating milestones. Under CVM, the valuer determines the company’s enterprise value as of the measurement date and then allocates that value across the capital structure using the liquidation preferences and conversion mechanics that would apply if a liquidity event occurred right now. This makes CVM a static, point‑in‑time approach that reflects only the value that has already been created, not the value that might be created in the future.

Because CVM does not incorporate forward‑looking expectations, the latest IPEV guidelines make its use extremely narrow, stating explicitly that CVM should only be applied “when an exit transaction is imminent” (page 41). In other words, CVM is appropriate only when the company is so close to a liquidity event that a market participant would effectively value it based on today’s enterprise value and capital structure rather than future optionality. Outside of that context, CVM can materially understate value because it ignores the asymmetric upside that defines venture investing. When used in the right circumstances, however, CVM provides a clear, mechanically consistent allocation of value across share classes, a useful tool when the finish line is truly in sight.

The Road Ahead: Applying These Methods in Real Valuations

Together, these three methodologies, PWERM, OPM, and CVM, form the backbone of fair value measurement for venture backed companies under both IPEV and ASC 820. In the coming weeks we’ll take a closer look at each one, how they work, when they’re appropriate, and how to apply them rigorously in real world VC valuations.