How Does a Company TRIPLE Its Valuation In a Short Period?

However, the above calculation is often oversimplified. In many cases, to access additional funding sources and cater to investors with a preference for steady income and reduced risk, the company may offer various classes of equity that convey various clauses and rights to them. These special clauses make the capitalization table diversified with preferred shares, common shares, options, and other securities. That implies that different classes of shares with different rights should have different fair values. Simply dividing the financing amount by the percentage of equity held will overlook the differences in rights and risks associated with classes of shares. The above calculation of post-money valuation normally does not represent the fair value of a private company with different classes of equity and usually results in overestimation.

Valuations of Contingent Claims in Equity Allocation Model

In professional business valuation, crucial steps are to carefully examine the private company’s capital structure, determine the priority terms associated with each class of shares, and allocate equity value into various classes of shares. The process, known as Equity Allocation, involves thoroughly reviewing Contingent Claims, such as liquidation preference, guarantee return, options, warrants and convertible securities, under some typical primary projected scenarios, such as IPO and Liquidation/Sales. The valuation of Contingent Claims under Liquidation/Sales scenario typically involves Option Pricing Models like the Black-Scholes Model (note 1), to obtain fair value for each specific class of share in the capital structure, according to IFRS 9.

• Contingent Claims under IPO scenario generally will trigger the mandatory conversion of preference shares. In case the options/warrants or convertible securities were in-the-money, instrument holder will exercise them at the agreed exercise price.

• Contingent Claims under Liquidation/Sales scenario are subject to specific terms and conditions. These stipulate that the preference shares will get back their guaranteed liquidation amount in a predetermined priority, and convertible securities may be converted into common shares or being lapsed in the event of liquidation or sale of a private company.

While post-money valuation provides a clear and straightforward method for determining the value of a private company after a financing round, it is crucial to acknowledge the potential impact of various special clauses and rights on valuation. The Equity Allocation Model is frequently employed to address this concern. Involving a professional valuation expert can contribute to ensuring the accuracy and fairness of valuations.