Understanding CVM (Waterfall) for ASC 820 and IPEV Compliance: A Practical, Down to Earth Guide for Venture Backed Valuations

Valuing early‑stage companies has always required judgment, but the 2025 IPEV Guidelines sharpen the boundaries around when certain methods could be used. One of the most important updates relates to the Current Value Method (CVM).

Historically, IPEV allowed CVM when an exit was expected “in the near future.” The 2025 update tightens this significantly:

⚠️ CVM is now appropriate only when an exit is imminent (IPEV Dec 2025 – Page 41)

This is more than a wording change — it’s a deliberate narrowing of scope. “Near future” left room for interpretation. “Imminent” means the exit is essentially at the finish line: highly probable, time‑bound, and driven by the company’s current state rather than future optionality.

As a result, CVM is no longer a general valuation method. It is a precision tool reserved for very specific circumstances.

🟦 When CVM Should Be Used (Under IPEV 2025)

CVM applies only when:

🚀 An IPO or M&A exit is expected to close soon i.e. imminently

📉 The exit price is based on today’s status of the company

🔒 Future optionality is irrelevant

🧩 Market participants would price the company as if the exit were already underway

Examples:

📝 A signed LOI with high certainty of closing

🤝 A binding sale agreement pending final approvals

In these cases, CVM provides a clean, defensible allocation of value across the capital structure.

🟥 When CVM Should Not Be Used

CVM is not appropriate when:

🔭 Value depends on future milestones

⏳ Exit timing is uncertain

📈 The business is still developing or scaling

🧮 Market participants would value the company based on future optionality

In these situations, IPEV expects practitioners to use:

🧭 PWERM (scenario‑based)

⚖️ OPM or Hybrid OPM/PWERM (option‑based)

📊 Market‑calibrated approaches

These methods capture the forward‑looking nature of venture‑backed companies.

🔧 How to Run CVM Calculations in Practice

To run CVM, everything starts with accurate inputs. In practice, this means having:

📊 A clean, fully reconciled cap table – Including SAFEs, convertibles etc.

📜 All rights, preferences, seniority, and participation terms captured correctly

🔍 Exit‑specific terms modeled exactly as written

Without this foundation, the waterfall won’t reflect real economics.

💧 Run the Liquidation Waterfall

This is where CVM becomes mechanical but detail‑heavy. You must model:

🥇 Liquidation preferences & seniority

➕ Participation rights

🔄 Conversion mechanics

📉 Any exit-triggered adjustments

The goal is to replicate how value actually flows through the stack.

💵 Allocate Value & Compute Per‑Share Results

Once the waterfall is modeled correctly:

· Value flows through the stack based on rights

· Common receives the residual

· Options/warrants are included if they’re in the money

The output is a fair value per share at the measurement date—grounded in the real terms of the imminent exit.

📝 Document the Logic

For transparency with auditors, LPs, and internal stakeholders, capture:

📌 Why the exit is considered imminent

📌 How enterprise value was determined

📌 How rights, preferences, and conversions were modeled

📌 Any sensitivities or alternative outcomes

Good documentation = fewer questions later.

📣 The Bottom Line

The 2025 IPEV update makes one thing clear:

CVM is no longer a broad valuation method — it is a targeted tool for imminent exits.

Used correctly, CVM provides a clean, defensible, and economically accurate snapshot of value at the finish line. Used incorrectly, it risks understating optionality and misrepresenting fair value.

While PWERM and OPM facilitate the modelling of potential future outcomes and their implications for fair value, CVM provides a basis for determining the value of shares once the expected outcome has become imminent.

🔗 To learn more about VCM or Fair Value methodologies, visit www.vcmsoftware.com or email us at info@vcmsoftware.com

This post is for informational purposes only and should not be considered valuation advice or a recommendation of any kind.