--- name: equity-valuation-method-selector description: "Evaluates a company's stage, financing history, and exit expectations to recommend the appropriate 409A valuation allocation methodology — OPM, PWERM, hybrid, or current value — with a documented rationale, key input requirements, and audit-defensibility notes. Use when selecting or justifying a 409A equity allocation method, preparing for a 409A valuation, or deciding between OPM, PWERM, and hybrid approaches for a VC-backed company." argument-hint: "[company-stage] [financing-history]" allowed-tools: ["Read"] --- # Equity Valuation Method Selector ## 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: 1. **Exit certainty**: None / speculative → distant. Specific event named with timeline → near and concrete. The more concrete the exit, the more PWERM applies. 2. **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. 3. **Financial predictability**: Can a defensible exit value and timing be forecast? Pre-revenue companies usually cannot; late-stage companies with named acquirers can. 4. **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 1. **Primary recommendation**: One method, stated decisively. 2. **Rationale**: 3–4 sentences mapping the company's diagnostic profile (Step 1) to why this method fits and why alternatives don't. 3. **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). 4. **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](https://docs.anthropic.com/en/docs/claude-code/skills) — markdown with YAML frontmatter at the top. **Installing in Claude Code:** - `~/.claude/skills//SKILL.md` — auto-loads in every session anywhere on your machine (recommended for skills you'll use across multiple projects) - `/.claude/skills//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:** 1. Drag this file into a new chat, or copy and paste its contents 2. 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