Purpose
Recommend the correct equity value allocation methodology for a 409A valuation — OPM, PWERM, hybrid, or current value method — based on the company's stage, capital structure, and exit visibility, with a documented rationale that holds up to auditor and IRS scrutiny. Eliminates the guesswork and rework of choosing a method that doesn't match the company's facts.
When to Use
Invoke this skill when the user asks to:
- Select or justify a 409A allocation methodology (OPM vs. PWERM vs. hybrid)
- Prepare for an upcoming 409A valuation or stock option repricing
- Decide which method fits a company nearing an IPO, acquisition, or down round
- Document a methodology rationale for an auditor, board, or 409A provider
- Reassess the right method after a new financing round or material event
- Understand what inputs a chosen method will require before engaging a valuation firm
Inputs Required
Before starting, collect:
- Company stage: Pre-seed / seed / early growth / late stage / pre-IPO / pre-acquisition
- Financing history: Rounds raised, most recent post-money, preferred share classes and liquidation preferences
- Exit visibility: Is a specific liquidity event (IPO, M&A) anticipated within ~12–24 months, and how concrete is it
- Capital structure complexity: Number of preferred series, participation rights, conversion terms, options outstanding
- Most recent financing recency: How many months since the last priced round
- Financial profile: Revenue stage (pre-revenue / early revenue / scaling), and whether reliable forecasts exist
- Audit/reporting context: Is the valuation for option grants only, or also for ASC 718 / audit support
If exit visibility is unstated, assume no near-term liquidity event and note the assumption. If capital structure detail is missing, ask one clarifying question about preferred liquidation preferences before recommending.
Instructions
Step 1: Characterize the Company Across Four Diagnostic Dimensions
Score the company on each dimension — these drive method selection:
- Exit certainty: None / speculative → distant. Specific event named with timeline → near and concrete. The more concrete the exit, the more PWERM applies.
- Capital structure complexity: Simple (single preferred, no participation) → complex (multiple series, participation, ratchets). Complex structures favor OPM, which models the option-like payoff of each class.
- Financial predictability: Can a defensible exit value and timing be forecast? Pre-revenue companies usually cannot; late-stage companies with named acquirers can.
- Stage of maturity: Early (value is mostly optionality) → late (value is increasingly resolvable into discrete outcomes).
Step 2: Apply the Method-Selection Framework
Option Pricing Method (OPM) Best fit when: the exit is distant or uncertain, the capital structure is complex with multiple preference layers, and discrete future outcomes cannot be reliably forecast.
- Treats each equity class as a call option on enterprise value, allocating value via Black-Scholes breakpoints set by liquidation preferences and conversion thresholds.
- Strongest for early- and mid-stage VC-backed companies with no near-term liquidity event.
- Why it holds up: it does not require speculative outcome scenarios — value is allocated mechanically from the cap table and a single volatility/term assumption.
Probability-Weighted Expected Return Method (PWERM) Best fit when: discrete exit scenarios are identifiable, each can be assigned a defensible probability and value, and an exit is reasonably foreseeable.
- Models multiple future outcomes (IPO at X, M&A at Y, dissolution), assigns probabilities, computes per-share value in each, then probability-weights and discounts to present.
- Strongest for late-stage / pre-IPO / pre-acquisition companies where the range of outcomes is narrowing.
- Why it holds up: directly reflects management's and the market's view of likely exits — but only when those scenarios and probabilities are genuinely supportable.
Hybrid Method (PWERM + OPM) Best fit when: at least one near-term outcome is concrete (e.g., a likely IPO) but other outcomes remain diffuse.
- Models the specific, foreseeable scenario(s) explicitly via PWERM, and allocates value within the "stay private / uncertain" scenario using OPM.
- Strongest for companies in transition — a credible IPO path exists alongside a meaningful chance of remaining private.
- Why it holds up: captures concrete near-term events without forcing speculative probabilities onto the remaining uncertainty.
Current Value Method (CVM) Best fit when: an exit or dissolution is imminent, or the company is so early that allocating by current liquidation waterfall is the only defensible approach.
- Allocates current equity value across share classes per the liquidation waterfall as if a sale occurred today.
- Use cautiously — generally only appropriate at the extremes (imminent transaction or earliest stage with no value beyond preferences).
Step 3: Produce the Recommendation
- Primary recommendation: One method, stated decisively.
- Rationale: 3–4 sentences mapping the company's diagnostic profile (Step 1) to why this method fits and why alternatives don't.
- Required inputs for the chosen method: The specific data the valuation firm will need (e.g., for OPM: volatility benchmark via comparable companies, expected term to liquidity, risk-free rate, full cap table breakpoints; for PWERM: scenario definitions, probabilities, per-scenario exit values, discount rate).
- Key assumptions to defend: The 2–3 assumptions most likely to draw auditor scrutiny, and how to support them.
Step 4: Flag Reassessment Triggers
State the specific events that would warrant revisiting the method — a new priced round, a signed term sheet for an acquisition, an S-1 filing, or 12+ months of staleness.
Output Format
- Structure: Diagnostic profile → method framework summary → recommendation block → reassessment triggers
- Length: 700–1,000 words
- Format: Structured prose with labeled subsections; diagnostic dimensions and required inputs as bulleted lists
- Sections: Company Diagnostic Profile → Method Options Considered → Recommendation (method + rationale + required inputs + assumptions to defend) → Reassessment Triggers
- Tone: Valuation specialist — precise, decisive, audit-aware; no hedging on the final recommendation
Quality Checklist
Before delivering output, verify:
- [ ] The company is scored on all four diagnostic dimensions (exit certainty, complexity, predictability, maturity)
- [ ] Exactly one primary method is recommended — not a list of options without a decision
- [ ] The rationale explicitly states why the chosen method fits AND why at least one alternative was rejected
- [ ] Required inputs are specific to the recommended method (not a generic list applicable to all methods)
- [ ] At least two audit-scrutiny assumptions are named with support guidance
- [ ] Reassessment triggers reference concrete events, not vague timelines
Notes
- Most VC-backed companies without a named near-term exit are correctly served by OPM — start there and only escalate to PWERM or hybrid when concrete exit scenarios exist.
- The single most common error is applying PWERM to early-stage companies, which forces speculative probabilities that auditors will challenge; require genuinely supportable scenarios before recommending it.
- This skill recommends and justifies a methodology — it does not produce the valuation itself. Advise the user that the actual 409A should be performed or reviewed by a qualified valuation provider for safe-harbor protection.
- A staleness over 12 months, or any material event since the last valuation, generally requires a fresh 409A regardless of the method previously used.
How to use this skill
This file is a Claude Code skill in Anthropic's standard format — markdown with YAML frontmatter at the top.
Installing in Claude Code:
~/.claude/skills/<folder-name>/SKILL.md— auto-loads in every session anywhere on your machine (recommended for skills you'll use across multiple projects)<your-project>/.claude/skills/<folder-name>/SKILL.md— auto-loads only when working in that project (recommended for project-specific skills)
Restart Claude Code or open a new session to register.
Using in Claude.ai, ChatGPT, Gemini, or other AI tools:
- Drag this file into a new chat, or copy and paste its contents
- Send your task or request as your next message — the AI will apply the skill where it fits
For Claude Code skill details: https://docs.anthropic.com/en/docs/claude-code/skills