Preferred Stock: Valuing Multiple Layers of Equity Securities in Venture-Backed Companies
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Compared to more traditional firm structures, legal, regulatory, and financial matters play a much larger role in the determination of value of equity securities for venture-backed companies. In "Preferred Stock: Valuing Multiple Layers of Equity Securities in Venture-Backed Companies" expert Joel Johnson dissects the determinants to equity value in venture-backed companies to show how to properly assess the value of both preferred and common shares. His presentation addresses equity values and their valuations, including a discussion of which valuation techniques are most appropriate for this unique setting.
- Features of preferred stock which affect their value:
- Liquidation preference
- Cumulative and non-cumulative dividends
- Participation and participation caps
- How to identify each of these features in a company's articles of incorporation
- Review "tranched" preferred stock and a model for separating the value of the forward contract from the issued security
- Review a stock purchase agreement and other legal documentation to identify tranche amounts, tranche milestones and "pay to play" provisions
- How to build a "waterfall schedule" showing the payout of equity to each class of preferred and common stock
- How to calculate equity "breakpoints" for an option-pricing model
- Review the major methods for allocating value among preferred and common securities: the PWERM, the OPM and hybrid
- Review when an OPM backsolve method is and is not appropriate
- Alternatives for addressing the value of preferred warrants
- How to determine if the valuation model's results are reasonable
- Identify the drivers of value for equity securities in venture-backed companies
- Define how these drivers are determined and recorded and identify how to put these resources to use in the valuation process
- Associate traditional equity modeling and valuation techniques with assignments for venture-backed companies
- Identify how to assess the reasonableness of a valuation model's results
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