Navigating the Jungle of Valuing Complex Capital Structures in Privately Held Companies: An Integrative Simulation Approach

With the FASB's emphasis on fair value, valuation of privately held companies' capital structures has taken on additional emphasis. Each methodology proposed in the AICPA's Practice Aid "Valuation of Privately-Held-Company Equity Securities Issued as Compensation" can result in suboptimal valuations when valuing complex capital structures. We discuss valuation of such capital structures and offer a workable, integrated simulation methodology combining the strengths of the probability-weighted expected return method with those of the option-pricing method. We demonstrate the methodology using transformed real-world data resulting in a flexible methodology that can be expanded to accommodate various aspects of complex capital structures.