Business Valuation Quarterly Brief - Q4 2025

Summary

On December 18, 2025, the AICPA released for public comment a comprehensive update to its Accounting and Valuation Guide: Valuation of Privately-Held-Company Equity Securities Issued as Compensation—commonly known as the “Cheap Stock Guide.” The working draft represents the first comprehensive revision since 2013 and reflects the AICPA Equity Securities Task Force’s views on current best practices for estimating the fair value of privately held company equity securities issued in connection with stock-based compensation. Although the guide is nonauthoritative, it has long served as one of the profession’s most influential references for financial reporting valuations performed under ASC 718.

The updated guide is intended for financial statement preparers, boards of directors, valuation specialists, auditors, and other users involved in determining the fair value of privately held company equity securities underlying share-based compensation awards. While its primary focus remains financial reporting under ASC 718, the guide also discusses broader valuation concepts, allocation methodologies, market participant assumptions, and related accounting and disclosure considerations.

The most significant revisions address valuation issues that have evolved considerably over the past decade. These include allocating value among multiple classes of securities in complex capital structures, evaluating primary and secondary transactions, applying calibration techniques, assessing market participant assumptions, and refining the use of valuation methodologies such as the Option Pricing Method (OPM). The Task Force specifically notes that the expanded guidance on complex capital structures and secondary transactions is expected to have significant implications for financial reporting valuations of privately held company common stock.

Because this document remains a working draft, its contents may change before issuance of the final guide. Nevertheless, it provides valuable insight into the direction in which valuation best practices are evolving.

Background

The original guide was published in 2004 to provide practitioners with practical guidance for valuing privately held company equity securities issued as compensation. A major revision followed in 2013, incorporating developments in valuation practice together with changes in accounting guidance, including ASC 718 and ASC 820.

Since then, however, private capital markets have changed dramatically. Companies now remain private longer, venture-backed businesses often develop increasingly complex capital structures, and transactions involving privately held securities have become substantially more common. The Task Force explains that these observable market transactions—particularly secondary transactions—have provided new evidence regarding how market participants price different classes of securities and, in some circumstances, suggest that common and preferred shares may be closer in value than previously assumed. These market developments form much of the basis for the current revision.

The Task Force also reiterates an important point regarding the guide’s purpose. Rather than establishing valuation standards, the guide identifies what the Task Force considers to be current best practices in valuing privately held company equity securities for financial reporting purposes. It is intended to assist practitioners in exercising professional judgment—not to prescribe a single valuation methodology or produce a “how-to” manual.

Principal Proposed Enhancements

Although revisions appear throughout the guide, several themes emerge consistently.

• Greater emphasis on market participant assumptions

One of the most notable developments is the guide’s closer alignment with the fair value framework established by ASC 820. Although ASC 718 governs stock-based compensation, the Task Force explains that ASC 820 contains concepts that practitioners may find helpful when estimating fair value and recommends following ASC 820’s measurement framework unless it conflicts with ASC 718. Throughout the guide, market participant assumptions—not entity-specific assumptions—serve as the foundation for estimating fair value.

This emphasis extends beyond theoretical discussion. The guide repeatedly encourages valuation specialists to maximize the use of relevant observable inputs while minimizing reliance on unobservable inputs whenever possible, consistent with ASC 820’s fair value hierarchy. It further stresses that valuation conclusions should reflect assumptions that knowledgeable, independent market participants would make in an orderly transaction.

• Increased importance of observable market transactions

Perhaps the most consequential practical change is the expanded discussion of primary transactions, secondary transactions, and company repurchases. Compared with the 2013 edition, the working draft places substantially greater emphasis on evaluating observable transactions as evidence of value.

The Task Force explains that the increase in secondary market activity since publication of the prior guide has produced additional pricing evidence that should be considered when estimating fair value. Rather than treating secondary transactions as unusual or inherently unreliable, the updated guidance provides a significantly more comprehensive framework for evaluating their relevance. Practitioners are encouraged to consider the principal market in which transactions occur, determine what those transactions imply about market participant expectations, and calibrate valuation conclusions to observable market evidence whenever appropriate.

• Calibration Receives Much Greater Attention

One of the most significant themes throughout the working draft is the increased emphasis on calibration. Although calibration has long been recognized as a sound valuation practice, the updated guide elevates its importance by repeatedly encouraging practitioners to reconcile valuation assumptions with observable market evidence whenever reliable transactions exist.

Rather than viewing a valuation model as an independent exercise, the Task Force describes calibration as a means of ensuring that the assumptions embedded within a valuation model are consistent with prices actually observed in market transactions. If a recent financing round or other relevant market transaction exists, the selected valuation methodology should be capable of explaining that observed pricing before it is relied upon for subsequent valuation dates.

Calibration also serves another important purpose. Once a model has been calibrated to an observable transaction, future valuations begin with a market-based foundation rather than a theoretical one. Subsequent changes in value should therefore be supported by changes in company performance, market conditions, capital structure, or other relevant facts rather than unexplained adjustments to valuation assumptions.

Editorial Illustration — Calibration

Assume a company completes a preferred stock financing at $10.00 per share. Rather than simply accepting that transaction price and independently estimating the common stock value, the valuation specialist first develops a model that reproduces the observed financing price using reasonable assumptions regarding volatility, expected liquidity timing, discount rates, and allocation methodology. Once the model has been calibrated, future valuations can begin with those assumptions and adjust them only as underlying facts change. This process helps ensure that subsequent valuations remain anchored to observable market evidence rather than subjective judgment.

The working draft does not prescribe a single calibration methodology. Instead, it emphasizes the broader principle that observable transactions should be incorporated thoughtfully into the valuation process whenever they provide meaningful evidence of fair value.

• Complex Capital Structures Receive Expanded Treatment

The most extensive technical revisions appear in Chapter 6, which addresses valuation in complex capital structures.

The Task Force identifies this chapter as one of the areas expected to have the greatest practical impact on financial reporting valuations. The updated guidance reflects evolving market practices and emphasizes that allocation methodologies should produce results consistent with market participant assumptions regarding the economic rights of preferred and common shareholders.

In particular, the guide encourages practitioners to critically evaluate assumptions surrounding liquidation preferences, expected exit values, volatility, expected liquidity timing, and investor return requirements rather than mechanically applying established allocation models.

Importantly, the Task Force does not introduce a new required allocation methodology. Instead, it provides substantially expanded guidance for evaluating whether existing methodologies appropriately reflect the economics of increasingly sophisticated capital structures.

• Greater Scrutiny of the Option Pricing Method

Because the Option Pricing Method (OPM) has become one of the most commonly used allocation methodologies for venture-backed companies, the working draft devotes significant attention to its application.

Rather than replacing or discouraging the use of OPM, the guide raises expectations regarding its implementation. Practitioners are encouraged to critically evaluate the assumptions embedded within the model, particularly those affecting volatility, expected liquidity events, breakpoints, and investor behavior. The guide also emphasizes corroborating OPM results using other available evidence whenever practical.

The overall message is not that OPM has become less appropriate, but rather that its credibility depends increasingly on demonstrating that the underlying assumptions are reasonable, internally consistent, and supported by observable market evidence.

• Scenario-Based Method (Formerly PWERM)

Another notable change is the terminology used to describe probability-weighted valuation techniques.

The working draft adopts the term Scenario-Based Method (SBM) in place of the more familiar Probability-Weighted Expected Return Method (PWERM) while describing substantially the same underlying valuation concept. Under this approach, value is estimated by considering multiple potential future outcomes—such as an IPO, strategic acquisition, or continued private operation—and weighting each according to its probability of occurrence.

Although the terminology has changed, the underlying objective remains the same: estimate fair value by considering the range of reasonably possible future outcomes from the perspective of market participants rather than relying on a single deterministic scenario.

• Secondary Transactions Are Neither Automatically Accepted nor Automatically Rejected

Perhaps one of the most balanced discussions in the working draft concerns secondary transactions.

Historically, many practitioners viewed secondary sales with skepticism because they frequently involve limited information, negotiated prices, or individual investor circumstances. The updated guide adopts a more nuanced approach.

Rather than assuming that every secondary transaction represents fair value—or conversely dismissing such transactions entirely—the Task Force encourages practitioners to evaluate the characteristics of each transaction individually. Considerations include whether the transaction occurred in the principal (or most advantageous) market, whether it was orderly, whether participants were knowledgeable and independent, and what the transaction implies regarding market participant assumptions.

If a secondary transaction is considered relevant, practitioners should understand why it supports the valuation conclusion. If it is rejected, the reasons for doing so should likewise be supportable.

Editorial Illustration — Secondary Transactions

Suppose an employee sells common shares to an unrelated institutional investor shortly before the valuation date. The transaction should not automatically establish fair value simply because it occurred. Likewise, it should not be ignored merely because it was a secondary sale. Instead, the valuation specialist would evaluate whether the transaction was orderly, whether both parties were knowledgeable and willing, whether the market was representative, and whether the transaction provides meaningful evidence of how market participants value the security.

This framework represents a more evidence-based approach than simply categorizing secondary transactions as either reliable or unreliable.

• Compensatory Elements and Related Accounting Considerations

Beyond valuation methodology, the working draft also expands its discussion of the accounting implications of transactions involving a company’s own equity securities. Particular attention is given to determining whether secondary transactions or company repurchases include a compensatory element that should be recognized as compensation expense rather than simply treated as an equity transaction.

The guide provides a framework for evaluating these situations and reminds practitioners that valuation conclusions cannot be developed in isolation from the underlying accounting treatment. Transactions that appear reasonable from a valuation perspective may nevertheless require additional accounting analysis depending on the facts and circumstances. The working draft also discusses related disclosure considerations under ASC 718 and ASC 275, as well as SEC expectations for companies preparing for an initial public offering.

• What Has Not Changed

While the proposed revisions are significant, the working draft also reinforces several principles that remain unchanged.

The guide does not replace ASC 718 as the governing accounting standard for stock-based compensation, nor does it supersede ASC 820. Rather, it recommends using ASC 820’s fair value framework when it is consistent with ASC 718.

Likewise, the guide does not establish mandatory valuation standards. Instead, it identifies what the Equity Securities Task Force believes to be current best practices, recognizing that professional judgment remains essential and that different valuation specialists may reasonably reach different conclusions.

The working draft also does not prescribe a single allocation methodology. The Option Pricing Method, Scenario-Based Method, Common Stock Equivalent Method, and simulation methods all remain acceptable when appropriate for the facts and circumstances. The emphasis is not on selecting a particular methodology but on selecting one that faithfully reflects market participant assumptions and is supported by appropriate evidence.

Finally, although secondary transactions receive much greater attention than in previous editions, the guide does not suggest that every secondary sale establishes fair value. Rather, each transaction must be evaluated on its own merits to determine whether it provides reliable evidence of value.

Key Takeaways

• The working draft represents the first comprehensive update to the AICPA’s valuation guide since 2013 and reflects significant developments in private capital markets and valuation practice.
• Observable market evidence—including primary financings, secondary transactions, and company repurchases—plays a more prominent role throughout the valuation process than in prior guidance.
• Calibration is emphasized as an important means of ensuring that valuation assumptions remain consistent with observable market pricing.
• Existing allocation methodologies remain appropriate, but practitioners are expected to apply them with greater discipline and stronger support for key assumptions.
• The guide encourages closer alignment with ASC 820’s fair value framework while recognizing that ASC 718 continues to govern stock-based compensation valuations.
• Although still a working draft, the document provides a clear indication of the direction in which valuation best practices are evolving.

Why It Matters – Editorial Commentary

Although this document remains a working draft, it provides perhaps the clearest indication yet of how the AICPA believes best practices for valuing privately held company equity securities have evolved since 2013. The proposed revisions reflect a profession that increasingly expects valuation conclusions to be anchored in observable market evidence, supported by well-reasoned assumptions, and thoroughly documented.

For valuation practitioners, the practical message is straightforward. Expect greater scrutiny of calibration analyses, more thoughtful consideration of primary and secondary transactions, and increased emphasis on explaining—not simply applying—the assumptions underlying allocation methodologies. Those who begin incorporating these concepts into their valuation process now will likely be better prepared for auditor review, financial reporting discussions, and the eventual release of the final guide.