The stage of operational development of an enterprise is an important determinant of the value of the securities within the enterprise and an indicator for which valuation approach or approaches are generally more appropriate. This article defines and delineates the stages used in this guide describs the relationship Between Fair Value and Stages of Enterprise Development and provides additional guidance about the appropriateness of the approaches in the various stages.

An enterprise typically builds value throughout the various stages of development but generally not in a linear fashion. In valuing the securities within an enterprise, it is important to recognize the enterprise’s stage of development and its achievement of developmental milestones. The stage of development will influence the perceived risk of investing in the enterprise, which, in turn, will influence the valuation.

developmental milestones. The stage of development will influence the perceived risk of investing in the enterprise, which, in turn, will influence the valuation as follows:

1. Stage 1  – Enterprise has no product revenue to date and limited expense history and, typically, an incomplete management team with an idea, a plan, and possibly some initial product development. Typically, seed capital, or first-round financing, is provided during this stage by friends and family, angels, or venture capital firms focusing on early-stage enterprises, and the securities issued to those investors are occasionally in the form of common stock but are more commonly in the form of preferred stock. Preferred valuation method – OPM (establish the value based on an investment round) or Replacement costs (the efforts needed to develop the product to its current status).
2. Stage 2  – Enterprise has no product revenue to date and limited expense history and, typically, an incomplete management team with an idea, a plan, and possibly some initial product development. Typically, seed capital, or first-round financing, is provided during this stage by friends and family, angels, or venture capital firms focusing on early-stage enterprises, and the securities issued to those investors are occasionally in the form of common stock but are more commonly in the form of preferred stock. Preferred valuation method  – OPM of DCF (if reliable projections can be made)