Not to be outdone by 2025’s public stock markets, private stock valuations are about to go up. We can thank the new draft AICPA guidance. A new approach to secondary transactions and liquidation preferences is likely to increase the valuations of some common stock.
AICPA released a working draft of the updated Valuation of Privately-Held-Company Equity Securities Issued as Compensation guide in December 2025 (“AICPA Draft”). The first comprehensive update since 2013, this 342-page draft will reshape how privately held securities are valued.
The first watershed moment for common stock valuations came in the mid-2000’s. It scrapped the common 10% rule that set the stock option exercise price relative to the preferred issue price. New tax and financial reporting guidance forced a closer look at the common stock’s true fair value. It obliterated (albeit slowly) the 10% rule and introduced the models that shifted valuation closer to the 20-40% range.
The AICPA Draft sets forth guidance that will further increase the stock price. It views VC much more as an all-or-nothing sport, where the fortunes of preferred and common stockholders are closely aligned.
The SEC’s focus on private stock valuations, empirical observations, and two decades of practical implementation has called into question valuation best practices, particularly the Option Pricing Model (“OPM”). A workhorse of 409A valuation, OPM helps estimate specific values for each equity class, preferred, and common.
There are three basic areas where going forward valuation will be different:
One: Expect to see greater weight placed on binary outcomes, i.e., both preferred and common stock receive the same value. This alone will move the common stock valuation closer to the preferred issue price. Commonly centered around OPM, calculations will increasingly include a supplemental Common Stock Equivalent (“CSE”) scenario. The OPM assumptions will also be adjusted to reflect higher volatility and a longer time to exit; both would push valuations higher.
Two: Secondary transactions will play a greater role. Secondaries have been receiving a small weight, if any. They were often ignored because the transacting parties lacked sufficient information to make an informed decision. This reason no longer applies. Not only are secondary transactions expected to carry greater weight, but they are also expected to influence the main model, i.e., the one that produced the rock-bottom price.
Three: Several additional supporting calculations are required by the guidance. This is because no single model works automatically (i.e., OPM). The mandatory and incremental calculations include:
- Calibrating the valuation model to observed transaction prices (primary or secondary). The common OPM backsolve method “sets” the financial model such that it values the recently issued preferred stock at its issue price (the “Backsolve”). This may not be enough. The valuation would have to calibrate market multiples and, potentially, the DCF to the observed issue price. This calibration is an important method for trend analysis of valuation across valuation dates.
- It turns out (some valuation folks need to get out more) that there is an implied investor ROI in a typical 409A model. They call it a credit spread, and it now needs to be checked against market rates of return. A fascinating and isoteric invention that seems to be even further removed from the reality of the VC pricing process than OPM.
- Fair value of debt will play a greater role in common stock valuation. Debt has always been a part of the common stock valuation (Equity = Business Enterprise Value – Debt). The debt has been a non-issue since its book value was mostly good enough. The new guidance wants us to consider the fair value of debt. This can mean another valuation and a bit more work.
In summary, a mechanical, template-like approach to common stock valuations has been retired. Valuations would need to be supported by secondary calculations and additional scenarios to better align with the economic realities of privately held securities. Secondary transactions would be significant, potentially pushing valuations higher.
