Valuing Equity Compensation for Private Companies At A Glance

Services and Capabilities

Privately-held companies that reach later stages of development often contemplate exit strategies for their initial investors. Many such exit strategies require financial statements that conform to United States Generally Accepted Accounting Principles (GAAP). This requires proper recognition of compensation expenses. If the company paid any past compensation in the form of securities, including options, warrants, and other derivatives, a retrospective valuation of these securities will be required.

The valuation of privately-held company equity securities for the purposes of recognizing compensation expenses under GAAP can present unique challenges to the valuation analyst. These assignments often involve companies that expect to experience a liquidity event within a few years.

In 2004, the AICPA released a Practice Aid, aptly named "Valuation of Privately-Held-Company Equity Securities Issued as Compensation." Valuations performed in accordance with this Practice Aid may be more likely to meet the approval of a company's auditors. While all of the methodologies endorsed by the Practice Aid are recognized in the valuation community, the Practice Aid often expresses a preference for the use of one or more methods depending on company characteristics and/or the circumstances surrounding the valuation assignment.

NERA has previously worked with companies in valuation assignments that adhere to the guidelines within the Practice Aid for approval by the companies' auditors and for use in SEC filings.