Perspectives

Looking Back at Valuation Trends

From 2019 to 2021, deciding between OPMs and CSE allocation methodologies came to a head during the major run-up in private company valuations and multiples. This spike in valuations was particularly notable across the growth equity and venture capital space as abundant and cheap capital drove some overexuberance and elevated valuations.

At the time, OPMs would consistently undervalue virtually all securities in the capital stack. As evidence of the OPM providing impracticable results, many firms were buying junior preferred and common stock alongside large primary financing rounds at the same price as the primary offering. A standard OPM allocation methodology would place meaningfully different values across the securities in the preferred stack, while the aforementioned secondary purchases would imply the securities were worth the same price per share. This definitional undervaluing of junior securities contradicted market participant behavior and provided strong arguments against using an OPM.

Further, while mergers and acquisitions (M&A) outcomes can often be excellent for founders and shareholders alike, investment teams at the growth stage typically underwrite to an IPO where all shares typically convert to common. As such, at entry, the OPM would also not tie to the underwriting thesis given most preferred shares typically forcibly convert to common upon a qualifying IPO.

When the market began correcting in 2022, the use cases of the OPM grew in number. Frothy multiples at the peak of 2021 were almost always accompanied by similarly eye-popping growth, providing some justification for premium valuations. Once growth started to diminish, however, elevated multiples could no longer be justified, especially when paired with high cash burn lingering from the days of cheap capital. While not every company experienced the same level of performance degradation, it was clear that for many growth-stage businesses, valuations needed to decline from their 2021 peaks, placing a renewed focus on downside protections.

Liquidation preferences, participation rights, compounding dividends, return thresholds and more are put in place to provide downside protection. As valuations declined in 2022, many firms justifiably asked, “What about my preferential terms? Don’t I have some protection?” While an OPM tends to undervalue securities in a bull market, utilizing only a common stock equivalent or fully diluted allocation methodology in a bear market will undervalue all but the most junior preferred securities. Now, the question becomes how to balance the usage of the OPM and common stock equivalent analyses.

OPM and CSE Guidebook

For further data, please reference Lincoln’s Q2 2025 Venture Primer.

Simplified, Hypothetical Example

To understand the playbook above, suppose hypothetical Company A raised equity at a $2.7 billion post-money valuation at the peak of the market, where the hypothetical investor holds only the most recent preferred security (with standard terms like 1x pari passu liquidation preferences and no participation rights).

As illustrated, continuing to utilize only a fully diluted allocation methodology could understate the investment’s value. However, utilizing a blended approach reflects 1) a defensible equity value and 2) realistic exit scenarios (i.e. 50% chance of going public and 50% chance of getting acquired).

This approach works whether the market turns bearish or stays in a bull market. If the public market is active and liquidity is high, the OPM would be underweighted given the reduced likelihood of acquisitions dependent on liquidation preferences.  There are many additional nuances to consider, and every case has its own facts and circumstances to be evaluated. However, in Lincoln’s experience, the framework above threads the needle by satisfying audit requirements while still being anchored in real-world transactions and expected outcomes for the portfolio companies.