Practical Valaution Frameworks for Emerging Managers

Launching a venture capital fund involves navigating complex legal documents, chief among them the Limited Partnership Agreement (LPA). For first-time fund managers, one often-overlooked section of the LPA is the valuation clause – the provisions that dictate how the fund’s investments are valued over time. These clauses might seem like boilerplate legalese, but they have real implications for how your fund is perceived by Limited Partners (LPs) and how transparently you operate. In essence, the valuation clause sets the ground rules for measuring your portfolio’s performance between the big exit events.

Why do valuations matter so much? LPs evaluate a fund’s success not only at the final cash return, but also through interim reports that show the fair value of the startups in your portfolio. A solid valuation policy in your LPA helps ensure these interim valuations are determined consistently and credibly – which in turn builds LP trust. On the flip side, weak or vague valuation terms can lead to disputes, erode confidence, and even affect governance if LPs feel the General Partner (GP) has too much leeway in marking up (or not marking down) investments. Moreover, auditors and regulators increasingly expect funds to follow established valuation standards as part of financial reporting.

In this comprehensive guide, we’ll break down what exactly goes into a valuation clause, why it matters for transparency and governance, and how expectations have evolved (especially after the 2022 market correction that shook startup valuations). We’ll compare how different model LPAs handle valuation, including actual clause examples. We’ll also explain, in plain language, common valuation frameworks you’ll encounter, like the International Private Equity Valuation (IPEV) Guidelines, the VC Method, and our own methodology which encompasses both. To top it off, we’ll provide a visual summary table contrasting various LPA standards and a sample valuation clause you can consider for your own LPA.

Whether you’re drafting your first fund documents or reviewing an LPA from an LP’s perspective, this article will equip you with the knowledge to approach valuation clauses with confidence. Let’s dive in.

What Are Valuation Clauses and Why Do They Matter?

Valuation clauses in an LPA are the sections that outline how and when a fund’s investments will be valued during the life of the fund. In simple terms, this clause answers: “How do we decide what each startup in the portfolio is worth at any given time, and how do we report that to our investors?” These provisions might specify the valuation methodology to follow (for example, adherence to an industry standard), the frequency of valuations (quarterly, annually, etc.), and who is responsible for performing the valuations (usually the GP, possibly with oversight).

For LPs, these clauses are critical because interim valuations are the window into the fund’s performance before any cash returns occur. A venture fund typically has a 10+ year lifespan, and LPs cannot wait a decade to learn how things are going. They rely on quarterly or annual reports that include updated valuations of each portfolio company. Those reported values feed into Net Asset Value (NAV) calculations, which many institutional LPs use for their own accounting and portfolio management. In fact, private fund managers are required to undertake periodic valuations as part of ongoing reporting to investors. A well-defined valuation clause ensures everyone agrees on how those NAV figures will be arrived at.

Transparency

A robust valuation clause promotes transparency by committing the GP to a consistent approach. If the LPA says, for example, that the fund will value investments “at fair value according to the IPEV Guidelines on a quarterly basis,” LPs have a clear expectation of both the standard being applied and the frequency of updates. This reduces uncertainty and the potential for GP “gaming.” Without clear rules, a GP might be tempted to value subjectively – perhaps keeping a struggling startup at an overly optimistic valuation, or conversely, marking down aggressively to manage expectations. Either extreme can mislead LPs. Transparent valuation practices, on the other hand, build credibility. LPs feel confident that the numbers in their statements mean something concrete and comparable across funds. As one industry resource notes, establishing portfolio company valuations based on an approved policy “assures LPs that your reporting is reliable and reasonable.”

Governance

Valuation clauses also have a governance dimension. Remember, GPs typically earn carried interest (their share of profits) based on the fund’s performance. In most venture LPAs, carry is only realized upon actual exits, not just paper gains. However, inflated interim valuations can paint a rosier picture of a GP’s track record when they go to raise the next fund. LPs know this, which is why they push for checks and balances on valuations to align interests. For example, many institutional LPs insist on an LP Advisory Committee (LPAC) having the right to review or approve the valuation methodology. ILPA (Institutional Limited Partners Association) guidelines explicitly state that “Valuation policy and practices should be documented by the GP and reviewed with the LPAC… Valuation of portfolio companies should be reviewed with LPAC no less than quarterly.” In practice, this means a subset of representative LPs might meet with the GP each quarter to go over any valuation changes and ensure they’re reasonable. This kind of oversight, baked into the LPA, greatly improves governance by adding independent scrutiny on a process that would otherwise rely solely on GP judgment.

In summary, a valuation clause matters to LPs because it safeguards fund transparency, fair play, and accountability:

• It ensures the GP has a clear, agreed-upon policy for valuations, rather than making it up on the fly.
• It affects how openly the GP must share information (some LPAs even spell out what must be included in valuation reports, such as a commentary on any significant changes).
• It can empower LPs (via an LPAC or special rights for certain investors) to question and understand valuation decisions, which is crucial in a relationship built on trust.

For first-time managers, getting this clause right is important not just to satisfy picky LPs, but also to make your life easier. A clear valuation framework means you have a roadmap to follow when assessing your startups – useful when the time comes for quarterly reporting or the annual audit. It also sets the tone that you intend to run a professional, transparent operation, which can differentiate you in the eyes of experienced investors. As the ILPA Principles put it, alignment, governance, and transparency are the pillars of an effective partnership – and the valuation clause touches all three.

Typical Valuation Clause Content and Where It Falls Short

What does a typical valuation clause look like? Especially in many traditional or boilerplate LPAs, the language is surprisingly brief. It often boils down to something like: “The General Partner shall determine the Fair Value of each investment in good faith at least annually, and such valuations shall be conclusive and binding on all Partners.” In practice, this means the GP has broad discretion to decide what each portfolio company is worth, perhaps with a promise to use “good faith” (honest intent) and maybe a generic reference to GAAP or “fair value.”

Where is the downside? For early-stage funds and emerging managers, a simplistic valuation clause can be a double-edged sword. On one hand, it gives the GP flexibility, which can seem attractive. Early-stage companies are hard to value (often no revenues, comparable companies are imperfect, etc.), so the GP might think, “I don’t want my hands tied by a rigid formula.” But from the LP’s perspective, too much flexibility = too little accountability. Here are the common shortcomings of bare-bones valuation clauses:

• Infrequent or Delayed Valuations: If the LPA only requires annual valuations, that means an LP might go a full year with no update on what their investment is worth (aside from any exits). Annual valuation frequency was more common in decades past, but today it’s viewed as insufficient. Best practice is at least quarterly updates. With a yearly cadence, there’s a risk that big changes (up or down) in a startup’s fortune go unreported for months. For example, if a portfolio company lost a major customer in Q1 and its outlook dimmed, under an annual scheme the GP might not formally revalue it until year-end – leaving LPs in the dark in the interim. Emerging managers who stick to infrequent valuations may appear less transparent or even unsophisticated to potential LPs.
• Lack of Methodology or Standard: A vague clause (“valuations as determined by GP”) doesn’t specify how to determine value. Especially for early-stage startups, there are multiple methods one could use – cost basis, last round price, discounted cash flow, comparables, you name it. If the LPA is silent on methodology, the GP might default to a convenient heuristic, like “leave the valuation at cost until the next funding round.” While not uncommon, this practice can be problematic. Sticking to last round or cost can ignore negative developments (companies sometimes miss milestones or hit roadblocks that would realistically lower their value, even if no new financing has happened yet). On the flip side, it might also ignore positive developments (a startup might be doing far better than expected between rounds – is it really still only worth the last round price?). Without guidelines, there’s potential for inconsistency and bias. One portfolio company might be conservatively kept at cost, while another gets a rosy markup based on a flimsy comparable – all at GP’s whim. This unpredictability is exactly what LPs fear. They prefer to see a consistent, principled approach across the portfolio.
• No Independent Check: Perhaps the biggest concern is the conflict of interest inherent in GPs marking their own homework. A minimal clause offers no mechanism for an independent party to review or challenge valuations. In robust fund governance, usually either an LP advisory committee or an external valuation firm provides this check. If your LPA doesn’t mention any role for the LPs in the valuation process, savvy investors may negotiate for it via side letters or an LPAC charter. The absence of any independent valuation process can give the GP too much influence on reported performance. While we assume GPs act in good faith, the potential for bias (even subconscious) is real – especially for first-timers whose reputation is on the line.
• Limited Disclosure in Reports: A bare-bones clause might not detail what must be included when reporting valuations. Ideally, LPs want not just the number, but context: did you value that SaaS startup by applying a revenue multiple? Did you mark it down relative to last quarter and if so, why (e.g. “market multiples in the sector contracted”)? Boilerplate LPAs might skip these details, resulting in perfunctory reports. Emerging managers who only provide an NAV figure with no explanation risk frustrating their LPs. In contrast, the British Business Bank’s template, for example, mandates a “brief commentary on the progress of investments including any significant developments” alongside the valuation figures – ensuring the LP isn’t just seeing numbers in a vacuum.

To illustrate the shortfall, consider this example adapted from an LPA scenario:

Example (Weak Valuation Clause): “The General Partner shall determine the valuation of the Fund’s investments using its best judgment and shall provide financial reports to Limited Partners on an annual basis.”

For an LP, this language is not particularly comforting. It basically says “trust us, we’ll decide, and we’ll tell you once a year.” There’s no mention of industry standards like IPEV or GAAP fair value, no mention of external oversight, and only annual reporting. An LP reading this might fear that the GP could use “best judgment” to, say, keep a failing startup at the same value as its last funding round (to avoid showing a loss), or conversely, mark up an investment without justification. The annual report could end up being a black box.

Why it’s especially problematic for early-stage/emerging managers: First-time GPs don’t have a track record, so LPs are already taking a leap of faith. If on top of that, the LPA gives the GP free rein on valuations, experienced LPs might push back. They may worry that an inexperienced GP could misvalue companies out of optimism or lack of valuation skill. Early-stage companies often have no market prices, so the process is more art than science – which is all the more reason to have guardrails. Additionally, emerging managers often have smaller teams and may not initially plan for a CFO or valuation expert on staff. A weak valuation clause combined with limited internal resources could lead to errors or inconsistencies that erode LP confidence.

In short, the typical bare-minimum valuation clause leaves a lot to be desired. It falls short on frequency (often too infrequent), on methodology (too unspecified), and on oversight (too reliant on GP’s honor system). As the venture industry matures and LPs become more sophisticated, these simplistic clauses are increasingly seen as outdated. In the next section, we’ll explore how best practices are shifting to address these gaps – a shift that accelerated after the market volatility of 2022.

Best Practices and Evolving LP Expectations (Post-2022)

Over the past few years, particularly following the 2022 market correction, LPs have sharpened their focus on valuation practices. The exuberance of 2020-2021 – when startup valuations soared and many funds reported glowing paper gains – gave way to a harsh reality check in 2022. Public tech stocks plummeted, IPOs froze, and suddenly those lofty private valuations looked suspect. Many startups that raised money at sky-high prices saw their implied values drop dramatically by 2022-2023 (for instance, well-known unicorns like Klarna and Stripe took massive valuation cuts in subsequent rounds). In this environment, LPs became understandably concerned that GPs might be slow to write down holdings, thus painting an overly rosy picture of fund NAVs. And indeed, some GPs were reluctant to mark down – after all, nobody enjoys reporting negative performance.

By late 2022, industry voices were encouraging LPs to actively question GPs’ valuation assumptions. A Buyouts Insider report noted “enough yellow and orange flags, if not red flags, that show valuations may not reflect what an orderly market transaction should” – essentially urging LPs to press GPs on whether their marks are realistic. Regulators too have highlighted the issue: given the opaque nature of private markets, there’s a concern that “GPs might be overvaluing the businesses they own”, potentially misleading investors. All this has led to evolving LP expectations around valuation clauses and policies. Let’s break down the emerging best practices that first-time managers should be aware of:

• Frequent and Timely Valuations: The days of annual valuations are largely over, especially for venture funds with institutional LPs. Quarterly valuations are now the norm, with many LPAs explicitly requiring them. In some cases, LPs might even expect monthly top-line updates (though detailed valuations quarterly). The British Business Bank, for example, mandates that the fund send a valuation report within 60 days of each quarter’s end, and even wants a forward-looking cash needs forecast monthly. The principle is simple: in fast-moving markets, LPs want more frequent visibility. If macro conditions or a startup’s fortunes change suddenly (as happened in 2022 with the market downturn), LPs expect GPs to incorporate “known and knowable” information promptly into valuations, rather than wait many months. Best practice is to perform a valuation exercise at the end of each quarter, and communicate any material events in between if they significantly affect a holding’s value. Many modern LPAs include a clause that if something big happens (say a down-round financing or a bankruptcy of a portfolio company), the GP should report an updated valuation outside the regular schedule.
• Adherence to Established Valuation Standards: A key best practice is to anchor the valuation clause to an industry standard methodology. The leading standard in venture capital is the International Private Equity and Venture Capital Valuation Guidelines (IPEV). Updated most recently in December 2022, the IPEV Guidelines represent the consensus on how to measure fair value for private investments. They cover techniques like using comparable company multiples, recent transaction prices (calibrated for changes in the company or market), and discounted cash flows, all under the overarching principle of “fair value” (the price that would be received in an orderly transaction between market participants). By writing IPEV (or another standard like ASC 820 for U.S. GAAP) into your LPA, you signal that valuations won’t be ad hoc – they will follow current best practices. For instance, the British Business Bank’s LPA explicitly defines “Value” as determined by the Manager “in its reasonable discretion in following the International Private Equity and Venture Capital Valuation Guidelines (dated December 2022…)”. That one line in the definitions section effectively forces the GP to consider things like market conditions and the latest guidance on fair value. The 2022 IPEV update even added more governance around valuations, urging private equity firms to adopt best governance practices in the valuation process. In short, tying yourself to IPEV or similar standards is now expected by many LPs. It also helps avoid arguments – if an LP questions a valuation, you can point to the fact that you followed an industry-recognized method (and perhaps even involve external valuation experts to back it up).
• Enhanced LP Oversight & Governance: As mentioned earlier, ILPA and others encourage a role for LPs in monitoring valuations. Since 2022, LPs are even more keen on this. One manifestation is requiring an LP Advisory Committee review of valuations each quarter. Many newer LPAs give the LPAC rights not just around conflicts and key person issues, but also to approve the valuation policy and review valuations periodically. This doesn’t mean LPs are second-guessing every number (they typically don’t want to micro-manage), but it creates a structured dialogue where the GP must explain the rationale behind marks. For example, if the GP decided to mark down a certain investment by 25% due to a drop in comparable public multiples, they’d walk the LPAC through that analysis. If they decided not to mark down another company that missed its plan, they’d better be ready to justify why (perhaps strong mitigating factors or new sales pipeline, etc.). This quarterly check-in acts as a safeguard against valuation manipulation and builds trust that the GP isn’t hiding bad news. From a first-time GP perspective, involving the LPAC can actually be helpful – you get feedback and buy-in from your investors on tricky valuation judgments, which means less chance of nasty surprises later. LPs in 2025 want to be “more operationally engaged” and have more visibility into fund execution, and valuation oversight is part of that bigger trend.
• Independent Valuations or Audits: Another evolving expectation is the use of independent third parties in the valuation process, especially for hard-to-value assets. Some LPAs now stipulate that the GP may (or shall) engage an external valuation firm to review the portfolio periodically (say annually) or to opine on valuations above a certain threshold. Larger fund LPs, like pension funds, feel more comfortable if a reputable valuation firm or the fund’s auditors have audited the carrying values. In fact, many LPs will require an annual audit of the fund’s financial statements – during which auditors will scrutinize the GP’s valuations and demand justification and evidence. A clear valuation policy in the LPA makes that audit smoother. So, having it codified that you follow IPEV or have an independent valuation step isn’t just appeasing LPs, it’s preparing you for audit compliance. Post-2022, when auditors too are on high alert for overvalued assets, being proactive here is smart.
• Transparency and Detail in Reporting: LP expectations now go beyond just getting the NAV number – they want context. Best practice reporting in 2023-2025 includes providing the valuation methodology for each significant holding (e.g., “Company X valued at $50M post-money, based on last round in Jan 2023; Company Y valued at $30M using a 5x revenue multiple on LTM revenue of $6M, benchmarked to public comps; Company Z valued at cost due to being recently acquired in Q4 at that price.”). Many LPAs require a schedule or template of info to be delivered. The BBB’s template, for example, lists a host of data points for each portfolio company – from basic info like industry, start date, to the “basis of valuation of such assets” and the specific “Value to be attributed”. This level of detail ensures LPs aren’t left guessing how you arrived at a figure. It’s becoming common for LPs to expect a narrative along with numbers: a brief commentary on the portfolio each quarter, noting any big valuation changes and why. In the era of more open GP-LP communication, some GPs even offer to hop on quarterly calls or share dashboards. The overarching theme is no surprises. If a startup in your fund had to cut its valuation in half in a down round, a best practice approach is to telegraph that to LPs early (e.g., “we anticipate a markdown next quarter due to X…”). Post-2022, LPs appreciate candor – they know the market has been tough, and they’d rather have realistic interim marks than be hit with a sudden write-down after a year of silence. Indeed, many investors have shifted mindset: they prefer “transparency, consistency, and realism” in valuations over overly optimistic marks. Demonstrating those qualities in your valuation clause and process will meet the moment.
• Dynamic Valuation Approaches: In response to the market volatility, there’s a trend toward more dynamic valuation approaches. This might not be something explicitly written in the LPA, but it affects how you implement your policy. For example, some GPs are embracing more frequent calibrations to market data – if public SaaS multiples drop 30% in a quarter, they don’t wait until the next financing event to adjust their SaaS startup valuations downward accordingly (and vice versa for upward moves). Also, tools and frameworks like scenario analysis and milestone-based valuations are being used. A piece on the “new normal” for VC valuations highlighted that with few public comps in 2024, private valuations lean on outdated rounds or internal models, and many GPs were slow to mark down NAVs, creating a disconnect with reality It concludes that robust valuation frameworks and transparent, realistic application of them are critical for credibility. The takeaway: LPs expect GPs to do the homework – use data, models, and judgment to keep valuations as accurate as possible, rather than defaulting to stale figures. An LPA can encourage this by referencing the notion of “fair value” and current standards, which implicitly require considering current market conditions.

In summary, since the 2022 correction, LPs have raised the bar. They want valuations that are frequent, methodical, transparent, and honestly reflective of market conditions. For first-time managers, aligning your LPA and practices with these expectations isn’t just about avoiding LP complaints – it can be a selling point. Being able to say, “We follow IPEV guidelines, mark our portfolio quarterly, and have an LP advisory review of valuations,” positions you as a modern, trustworthy steward of capital. It shows you learned the lessons of the 2022 bubble and bust: namely, that chasing hype is out, and disciplined valuation is in.

Next, let’s look at how these principles appear in actual LPA language by comparing two different templates and then summarizing the differences in a handy table.

Comparative Analysis: Valuation in Different LPA Templates (VC Lab vs. British Business Bank)

Not all LPAs handle valuation clauses the same way. To see the range of approaches, let’s compare two concrete examples: the VC Lab “Cornerstone” LPA (a model document from VC Lab, which is an accelerator program for new VCs) and the British Business Bank (BBB) Enterprise Capital Fund LPA (a template used when the UK government’s British Business Bank invests in venture funds). These represent two ends of the spectrum in terms of prescriptiveness. We’ll examine how each addresses key elements: frequency of valuations, methodology, and disclosure/oversight requirements.

VC Lab’s Cornerstone LPA (v1.1) – Lean and GP-Centric

VC Lab provides a standardized LPA intended to simplify fund formation for emerging managers. In the Cornerstone LPA, the valuation clause is minimalistic. To recap the key line: “The calculation of the fair value of any Investment or Fund Asset shall be an amount determined by the General Partner at least annually. For all purposes of this Agreement, all valuations made pursuant to this section shall be final, conclusive and binding on the Fund and all Limited Partners.”.

Let’s unpack that:

• Frequency: “At least annually.” This sets a minimum of once per year for valuation. There’s flexibility to do more often, but the LPA doesn’t require quarterly marks. So technically a GP following this could do annual valuations (or could choose quarterly on their own initiative without violating the LPA).
• Methodology: No specific methodology or standard is named. It just says “fair value…determined by GP.” Fair value in a generic sense implies a market value concept, but the LPA doesn’t reference GAAP, IPEV, or any external metric. It’s basically, “GP decides the fair value in good faith.” Note: The LPA does include standard language elsewhere that GP decisions must be in good faith and can’t be reckless or fraudulent, so there is that general fiduciary duty overlay. But practically, the GP has wide latitude on how to come up with the numbers.
• Disclosure & Governance: The clause states valuations are “final and binding” on all parties. This means LPs can’t challenge the valuation numbers as long as they were determined per the LPA (barring extreme cases like fraud). There’s no mention of LP Advisory Committee approval or any independent valuation process. The LPA does not provide for any special reporting details in this clause either – it’s presumably covered under a general reporting section that the GP will send periodic financial statements. In short, the GP-centric approach is evident: the GP calls the shots on valuation, period.

From an emerging manager’s perspective, the VC Lab clause is straightforward and easy to comply with (just remember to do the valuation at least once a year). But as we discussed, many LPs today would find this too light. It relies 100% on the GP’s integrity and skill. There’s also a potential issue: if you only do annual valuations, how do you handle LPs’ need for quarterly NAV updates? In practice, even funds with such clauses often still report quarterly because their investors expect it. So, the VC Lab template might be more of a starting point that some GPs enhance with more frequent reporting in side letters or through trust.

British Business Bank’s ECF LPA – Structured and LP-Friendly

The British Business Bank (BBB), through its Enterprise Capital Funds (ECF) program, is often an LP in UK venture funds, and they provide a detailed LPA template. Unsurprisingly, the valuation and reporting requirements here are much more rigorous (the government likes its oversight!). Here’s how the BBB LPA handles it:

• Frequency: The LPA explicitly requires quarterly valuations and reports. Clause 15 says within 60 days of each quarter’s end (31 March, 30 June, 30 Sep, 31 Dec), the GP (manager) must prepare and send to each LP a report containing, among other things, “the Manager’s unaudited valuation of each Investment…and a portfolio valuation as at the end of the relevant quarter”. So, four times a year, every LP gets a full valuation report. This is a hard requirement, not just a best-effort.
• Methodology: Crucially, the BBB LPA doesn’t leave “fair value” undefined – it bakes the methodology into the definitions. The term “Value” is defined as the value of an investment determined by the Manager in its reasonable discretion following the International Private Equity and Venture Capital Valuation Guidelines (dated December 2022). This means the GP must use a methodology consistent with IPEV. In practice, that likely entails considering the price of recent investment (PROI) in the company and adjusting for any changes, or using comparables/DCF if no recent round, etc., all under the fair value framework. By referencing the Dec 2022 version, it also commits to any updates unless explicitly amended. This is a very LP-friendly term: it ensures the GP can’t, say, decide to value everything at cost out of convenience if fair value would dictate otherwise. Nor can the GP cook up a novel valuation method that departs from industry norms without violating the LPA.
• Disclosure & Oversight: The reporting clause is quite detailed. Each quarterly report to LPs must include not just the valuations but also information like the time since each investment was made, details of investments bought or sold in the period, a “brief commentary” on each portfolio company’s progress, and any significant events. This means LPs are kept well-informed. Additionally, because the BBB (a public investor) is in the fund, there’s a concept of a “Preferred Partner” (the BBB entity) who gets some extra rights – for instance, they alone receive details of all prospective investments considered by the manager, and they can request additional information at any time. They even require that the GP’s agreements with portfolio companies allow sharing of information with the BBB for monitoring purposes. While this goes beyond just valuation, it shows the level of oversight an anchor like BBB exercises. In terms of valuation governance, the BBB LPA does not explicitly mention an LPAC reviewing valuations (possibly because BBB itself fills that role by contract). However, given the IPEV requirement and quarterly cycle, the governance is effectively strong: the GP is constrained by standard guidelines and regular reporting to a fairly involved LP.

In essence, the BBB template embodies many best practices we outlined: quarterly frequency, IPEV methodology, detailed disclosure. It’s perhaps on the strict side, reflecting that public money demands accountability. An emerging manager whose LPs include something like BBB or other institutional investors should expect their LPA to look more like this than the ultra-simple VC Lab version.

Other Templates and Practices

Between these two extremes, many private fund LPAs (such as those used by established venture firms or those following ILPA model provisions) will have features of both:

• Most will specify at least quarterly reporting of valuations (the norm in the U.S. and Europe now).
• Many will invoke fair value standards, though sometimes indirectly (e.g., “valuations shall be conducted in accordance with U.S. GAAP (ASC 820) or IFRS, consistently applied”). In the U.S., the accounting rules effectively require fair value, so GPs often commit to GAAP financial statements which implies following those standards for valuation.
• There may be mention of an LP Advisory Committee’s role. For instance, some LPAs say “The GP shall consult with the LP Advisory Committee regarding the valuation methodology and material changes to valuation of investments,” echoing ILPA’s principles. As we saw, ILPA best practice is LPAC review quarterly.
• We should also mention VC Lab vs others: The VC Lab LPA is designed to be founder (GP) friendly and lightweight. In contrast, a traditional VC fund LPA drafted by institutional LPs’ lawyers might be more demanding. The ILPA Model LPA (if we consider ILPA’s model terms as a template) would certainly expect quarterly valuations and LPAC oversight. And some investors, like development finance institutions or fund-of-funds, might have side letter provisions reinforcing valuation standards (e.g., an LP could require “GP will provide an annual third-party valuation report at LP’s request” or similar).

To cement our comparison, here’s a visual summary of how valuation clauses can vary across different LPAs and evolving best practices:

Valuation Methodologies in Plain Language (IPEV Guidelines, and Equidam’s Approach)

Valuation doesn’t happen in a vacuum – GPs have to use actual methods to assign values to companies. A strong valuation clause might reference a methodology, but as a fund manager you also need to understand the tools available. Here we explain three important valuation frameworks you’ll encounter, in plain language, and why they matter:

• IPEV Guidelines (International Private Equity Valuation Guidelines): The IPEV Guidelines are the industry standard for fund valuation policy. In plain terms, IPEV is a set of recommendations that tell GPs how to figure out “fair value” for private companies in a consistent way. Fair value essentially means the price that would be agreed between a willing buyer and seller in an orderly transaction at the reporting date. Because there’s often no actual market transaction, GPs have to estimate it. IPEV provides a framework of acceptable methods:
  • If the company recently raised a round of funding, that Price of Recent Investment (PRI) can be a starting point for fair value, provided you adjust for any changes since that round. For instance, if your portfolio company raised money 9 months ago and nothing major has changed, you might hold it at that valuation; but if the company’s performance diverged significantly or market conditions changed (say, multiples in its sector fell), IPEV says you should consider marking up or down accordingly – not blindly hold the last price.
  • If there’s no recent round, you might use the Market Approach: look at comparable companies. For example, if your startup is an enterprise SaaS company, you examine public SaaS companies or recent M&A to derive an appropriate revenue multiple or EBITDA multiple, then apply that to your startup (with discounts as needed for size, growth, etc.). This approach roots your valuation in actual market data.
  • Another approach is the Income Approach, typically a Discounted Cash Flow (DCF) analysis. Here you project the company’s future cash flows (or perhaps its future exit value and interim cash flows) and discount them back to present using a risk-adjusted rate. DCF captures the intrinsic value based on the company’s ability to generate cash in the future.
  • IPEV also discusses less common methods like Replacement Cost (particularly for certain asset-heavy businesses) or Net Assets for companies where value is just the assets on balance sheet.

  IPEV’s 2022 update added guidance on handling market dislocation (e.g., sudden market crashes) and using “known or knowable” information at the valuation date. It emphasizes not using stale data – for instance, if by the time of valuation you know that a big customer was lost or a new competitor entered, you should factor that in. The guidelines also push for consistency and documentation (have a policy, apply it uniformly, and keep records of how you valued each investment). Many LPs regard adherence to IPEV as a sign of quality. Additionally, auditors will check if your valuations are consistent with IPEV/GAAP fair value; otherwise they might force write-downs or disclosures. So, in summary: IPEV = common language of fair value. An LPA referencing IPEV basically aligns your fund with current best practice and gives LPs comfort that you’ll be valuing investments similarly to other professional funds. For an emerging manager not deeply familiar with accounting standards, it’s wise to lean on IPEV (and perhaps engage a fund administrator or advisor who knows it) to guide your quarterly valuation process.

• Putting Guidelines into Practice: In accordance with the IPEV guidelines on assessing fair value, Equidam combines five distinct methods grouped into three core perspectives. These are: (1) Qualitative assessments – methods like the Scorecard and Checklist that compare a startup to benchmarks or tick boxes based on team, market, etc.; (2) Future cash flows – two forms of Discounted Cash Flow (DCF) analysis (one assuming a long-term growth model, and one using an exit multiple approach); and (3) Investor returns – the Venture Capital Method.By blending qualitative factors (e.g. the startup’s team strength, product, and market potential) with quantitative ones (financial forecasts and required returns), Equidam’s methodology provides a more balanced valuation. In practice, our platform takes inputs from the founder or investor, applies these various models, and then often averages or weighs them to arrive at a final figure. The benefit of this approach is that it mitigates the extreme uncertainty of any single method – for example, if a pure DCF says $5 million but a comparables-based method says $15 million, the truth might be somewhere in the middle. For first-time managers, understanding this approach is useful because it reflects how different angles (market comps, cash flows, qualitative scoring) can all inform value. It’s also a reminder that valuation is both art and science: a combination of numbers and judgment.

The combination – IPEV’s fair value framework implemented through our multi-method approach – covers a lot of ground. IPEV provides the ground rules of fair value that LPs and auditors expect you to follow in running your fund. Our platform emphasizes how you can systematically combine the different methods for startup valuation in a transparent process.

The key is to be able to explain your valuations in plain language to your LPs: e.g., “We valued this Series A SaaS company by looking at comparable public SaaS multiples, but we also cross-checked it with a DCF. The result seemed fair at 5x revenue, which aligns with IPEV fair value principles. Originally, we had priced it using the VC method targeting a 10x exit, but given current market multiples, our carrying value reflects a more moderate outlook.” Such an explanation hits all the notes: comparables, DCF, IPEV, VC method for context – showing you are thorough and transparent.

For fund managers, Equidam provides a stable, open framework for valuation with regularly updated parameters, including data from private and public market transactions. In addition to generating detailed valuation reports, we also help clients stay up to date on market changes which influence valuation outcomes (for example, see the notes attached to our upcoming parameters update). We’ve helped many venture capital firms through the process of establishing a practical and LP-friendly approach to valuation, which was readily approved by auditors thanks to the transparent and open nature of our methodology.

Suggested Valuation Clause Language for an LPA

To conclude, here is a sample section of LPA text (around 250 words) that incorporates many of the best practices discussed. This suggested valuation clause is written in plain-English style but is structured like an actual LPA provision. A first-time fund manager could use similar language in their LPA to give LPs comfort about the valuation process:

Valuation of Investments. The General Partner shall value each Investment of the Partnership at fair value in accordance with recognized valuation guidelines. In particular, the General Partner will apply the principles of the International Private Equity and Venture Capital Valuation (IPEV) Guidelines (December 2022 edition, as updated) when determining fair value. Valuations shall be conducted quarterly, as of the last day of each calendar quarter, and reported to Limited Partners within 60 days after quarter-end. For purposes of each quarterly report, the General Partner shall provide the valuation of each material Investment and a brief description of the valuation methodology or metrics used (e.g. comparable company multiples, recent transaction data, discounted cash flow, etc.). The General Partner shall maintain a consistent valuation policy and shall not change the methodology materially without notifying the Limited Partners and obtaining Advisory Committee review. All valuations made by the General Partner in good faith pursuant to this Section shall be final and binding for the purposes of the Partnership’s accounts and reporting to Limited Partners, provided that, upon the request of the Limited Partner Advisory Committee, the General Partner will confer in good faith regarding any valuation and consider any reasonable input from the Advisory Committee. The Partnership’s annual financial statements will be audited by an independent accounting firm, which will include a review of the valuations of Investments for conformity with this Section.

This clause strikes a balance between GP authority and LP oversight. It hard-codes quarterly, IPEV-based practices (so LPs get frequency and methodology assurances), commits to transparency in reporting, and involves the LP Advisory Committee in reviewing policies or specific concerns. At the same time, it preserves that the GP’s valuations done in good faith are binding (so LPs can’t sue just because they disagree with a number, absent bad faith). It also references the audit as an additional safeguard.

First-time managers can of course tailor the language – the key is to be clear, commit to standards, and show you welcome transparency. By including such robust valuation terms in your LPA, you set the stage for a trust-based partnership with your LPs, which is ultimately what every fund needs to succeed.