As special purpose acquisition companies (“SPACs”) progress through their life cycle, from initial public offering (“IPO”) to business combination or liquidation, financial instruments are often issued which trigger valuation needs.
In this piece, we consider a case study for an example SPAC and CFGI client:
Case study: ABC Acquisition Corp (“ABC”), an example SPAC and CFGI client which issued several instruments over its lifecycle and required fair value measurements at multiple points in time. At IPO, ABC sold Units that bundled: (i) a Class A redeemable share; (ii) one-tenth (1/10) of a Right that converts into one Class A share upon successful business combination; and (iii) one-half (1/2) of a warrant, where two halves combine into a whole public warrant exercisable for one Class A share (typically at a fixed strike, e.g., $11.50) subject to customary redemption features. Because financial reporting required a fair value allocation of the Unit at the IPO date, we valued each embedded component, inferring the value of the Right from success-scenario pricing and probability of consummation, and calibrating warrant inputs to market-observable dynamics.
As ABC progressed toward its business combination, high redemption risk and the need to secure closing capital led to additional financing. The SPAC entered into forward purchase agreements (FPAs) that committed an investor to purchase shares at closing at a price that steps up or down based on post-closing trading levels, and issued convertible promissory notes with equity-settlement features designed to conserve cash while aligning investor upside with transaction success. Each of these instruments introduced distinct payoff asymmetries and path dependencies, requiring periodic measurement at subsequent reporting dates and sensitivity analyses around key drivers (e.g., assumed closing-date share price).
This article uses the ABC engagement to frame how SPAC instruments are typically valued in practice. We begin with public and private warrants and Rights (including Unit allocation at IPO), then turn to founder shares, convertible notes, earnouts, and FPAs, outlining when approaches such as Monte Carlo simulation, binomial lattices, PWERM, and calibration are most appropriate. Along the way, we highlight practical challenges we encountered (e.g., supporting probability-of-consummation, handling price-based triggers near the $10.00 redemption anchor) and how we resolved them to deliver conclusions.
Common Financial Instruments Issued by SPACs
Public/Private Warrants: While there are a variety of permutations, the typical SPAC Unit consists of one Class A Redeemable Share and a public warrant to acquire one half of a share at a strike price of $11.50. The public warrant is typically exercisable for 5 years following the closing of a business combination and is typically redeemable by the issuer if the underlying shares trade over $18.00 for 20-of-30 trading days. This path dependent redemption feature typically suggests that Monte Carlo is an ideal valuation methodology, but some practitioners also employ binomial lattice models or simpler Black-Scholes methods.
Prior to the Unit’s split between shares and warrants, forward-looking volatilities can be estimated based upon observable historical and implied volatilities for similar structures and the underlying share price can be implied/derived through calibration. Following the Unit’s split, it is typically feasible to infer the implied volatility which correctly prices the public warrants, and to apply the same into the valuation of the non-redeemable private warrants in conjunction with an observable underlying share price. While typically issued at inception, additional private placement warrants can serve as a strategic means for a SPAC to raise capital even toward the end of its lifecycle. Standard SPAC warrant strike prices often range from $11.50 to $12.00; however, as the SPAC nears its merger date, adjusting strike prices to align with the market’s anticipated future stock price can make these instruments more attractive to investors. Such adjustments may involve features like down-round provisions or “crescent” terms, which modify the exercise price based on the pricing of newly issued equity-linked securities in connection with the business combination. These mechanisms help ensure that the warrants remain appealing and appropriately valued in the context of the SPAC’s evolving capital structure and market conditions.
Rights: Certain SPAC Units also include a right to claim a portion of a share, often 1/10th of a share, upon the completion of a business combination. As the rights do not have any claim to the cash in trust, they typically expire worthless in the event that a business combination is not consummated. Accordingly, the value of a right can typically be inferred from an exchange closing price or a presumed ‘success scenario’ price for the underlying share, multiplied by the probability of acquisition.
Case study: ABC needed the fair value of the allocation of the SPAC’s Unit, which is typically required at the IPO date. The composition of ABC’s Units in this particular case was 1/10th of one Right to a Class A Share at business combination completion, and one Class A Share. Given the Rights are not trading separately at the IPO date, we can infer their by leveraging the expected share price of the future operating company at business combination closing in conjunction with the probability of consummation. The fair value of the Right is pertinent in the ultimate conclusion of value for the overall Unit Allocation.
In cases where the Unit composition also includes warrants, the valuation approach may combine the PWERM applied to value the Right with the Monte Carlo, binomial lattice, or simpler Black-Scholes methods discussed above for the warrants.
Founder shares: Similar to Rights, founder shares typically provide the right to claim a Class A Share upon the completion of a business combination. Founder shares are typically issued to sponsors and to management/executives early in the SPAC’s life cycle. As the founder shares do not have any claim to the cash in trust, they typically expire worthless in the event that a business combination is not consummated. Accordingly, the value of a founder share can typically be inferred from an exchange closing price or a presumed ‘success scenario’ price for the underlying share, multiplied by the probability of acquisition. Often, a discount for lack of marketability is warranted due to a prospective market participant buyer’s inability to liquidate these shares until the conclusion of a lock-up period or the achievement of certain price-based thresholds.
Convertible Notes: Convertible notes can offer financial flexibility for a SPAC looking to raise funds, as the investor’s ability to convert the notes into equity typically reduces the coupon rate required by the investor. This can be especially beneficial given that if a business combination is not consummated, the SPAC borrower often will not have the liquidity to repay the loan in cash. However, if the business combination is completed, the investor may choose to receive compensation in equity (shares/warrants of the target company) rather than cash. Many SPAC convertible notes pay no interest or carry relatively nominal interest rates, which may be paid in cash or may be paid in kind (“PIK”), which offers a relatively short-term low-risk method of raising capital and maintaining sufficient liquidity to complete the business combination. In our experience and depending upon the specific terms, various methodologies can be applied to value SPAC convertible notes including binomial lattice models, Monte Carlo simulation, and the probability-weighted expected return method (“PWERM”).
Case study: ABC needed to raise cash to fund several extensions of their completion deadline. They entered into convertible promissory notes, which allowed the holder to convert the note into Class A Shares at business combination at a fixed conversion price. We employed a PWERM to estimate the fair value of the convertible promissory notes as of their issuance date and as of subsequent financial reporting dates leading up to the notes’ conversion at the closing of business combination. The PWERM approach employed included a bond + call framework for the embedded conversion option. One challenge we ran into was estimating the probability of consummation of the business combination. We were able to query for a large sample of SPACs that had recently entered into business combination agreements and infer probabilities of closing from the exchange-traded prices of their Rights, combined with Management insight, and effectively support the probability.
Earnouts: Earnouts are a unique way for a SPAC to negotiate consideration with a target. Typically, the SPAC will offer a certain number of shares, warrants, or other instruments to investors with certain vesting criteria. This vesting criteria may be in the form of market indicators like stock-price thresholds over a certain period. However, it can also include core financial metric indicators including revenue and EBITDA. If the thresholds are achieved over the vesting period, the holders will receive the specified shares or warrants. In our experience, Monte Carlo simulation is typically applied to value SPAC earnouts, in accordance with the Appraisal Foundation’s Valuation of Contingent Consideration guidance.
Forward Purchase Agreements: Forward Purchase Agreements (“FPAs” or “Equity Forwards”) are another unique way for SPACs to raise capital. In their simplest forms, these instruments obligate investors to purchase a certain number of shares of the SPAC at business combination, at a fixed or variable price. This can be enticing to a target company, as it shows that if the business combination is expected to close, that a considerable amount of capital will be available to push it to the finish line, as well as fund the early operations of the business. After the business combination, if the share price increases significantly, the investors can typically return their original purchase price to the company and liquidate the underlying shares into the open market, collecting the difference. If the share price decreases significantly, the investors can typically return the shares. In our experience, Monte Carlo simulation is typically applied to value SPAC earnouts.
Case study: ABC raised additional capital ahead of its business-combination vote through a Forward Purchase Agreement (FPA) that requires an investor to buy ordinary shares at closing for a variable price linked to the post-closing share price over a certain period of time. We valued the FPA at inception and at each quarterly reporting date using a Monte Carlo simulation.
Because SPAC shares tend to trade near the $10.00 redemption threshold prior to the closing of the business combination (shell company with cash in trust), the closing price on the Valuation Date my not accurately represent the merged company’s future stock value. The starting share price used in the simulation therefore has an outsized effect on fair value: if the stock price at the end of the simulation period is $15, the investor’s purchase price steps up and the FPA liability increases; if the stock prices ends at $5, the purchase price steps down and the liability decreases. At management’s request, we prepared a sensitivity table that varied the assumed closing-date share price in $1.00 increments—from $5 to $15—and presented the corresponding change in fair value, clearly illustrating how each dollar above or below $10.00 moves the expected fair value of the instrument.
How CFGI Can Help
CFGI occupies a distinct and highly active position in the SPAC valuation landscape, having supported a significant volume of complex instrument engagements since the surge in SPAC activity in 2021. Our Complex Financial Instruments team offers deep technical expertise and hands-on experience valuing a wide range of SPAC-related securities—including public and private warrants, rights, founder shares, earnouts, convertible notes, and forward purchase agreements. Backed by CFGI’s nationally recognized Accounting Advisory practice, which regularly supports SPAC IPOs, de-SPAC readiness, and SEC reporting, our valuation team benefits from a broader platform that enhances cross-functional insights and audit alignment. This combination has allowed us to refine market-tested methodologies and deliver valuations that are both technically sound and strategically informed.
Our team is highly experienced in working alongside audit firms and third-party appraisers, ensuring that our analyses are audit-ready, defensible, and compliant with ASC 820, ASC 805, and other relevant accounting guidance. As a trusted valuation partner, we support clients through every phase of the SPAC lifecycle, from formation to business combination and beyond, with precision and professionalism. Our commitment to technical rigor, responsiveness, and collaboration has helped solidify CFGI’s reputation as a leading provider of complex valuation solutions in the SPAC market. Furthermore, we understand that valuation needs for SPAC-related securities can be identified late in the audit process and can be extremely time sensitive; accordingly, our Complex Financial Instruments team boasts a deep bench of experienced and highly responsive professionals and specialists.
