Summary
What is Private Company Valuation? A set of valuation methods used to determine the enterprise value of a private company.
The Enterprise Value of a Private Company
Pre-Money Valuation or Startup Stock Valuation
Table of contents
Getting Start-up Equity? Everything You Need to Know About Exit Value
Joining a startup can be highly rewarding. Join a growing enterprise, receive an equity grant, and make a meaningful industry impact. The equity in a startup compensation package often includes stock and salary. Seek an expert assessment of the potential equity offer from BA FL|GA|HI in startup valuations.
Please read our article on pre versus post-money valuations.
What is a start-up stock valuation or the enterprise value of a private company?
Startup stock is a form of employee compensation where employees receive a portion of compensation in the form of shares. These shares have a vesting period and a strike price. Our business valuation uses “phantom stock” to describe equity shares distributed over time to retain employees. We also consider ownership percentage and minority interest when valuing your company stock.
Offering shares in the startup is a competitive tactic to attract potential employees. Once hired, this type of compensation incentivizes employees to perform well. Employees with equity in the startup may be more motivated to take risks and work longer hours, with the potential for significant earnings if the company goes public.
Startup Valuations or private company valuations
The value of a stock determines the potential payoff for startup founders and other shareholders in an exit strategy. However, the value of a stock depends on whether it is a share in a public or private company.
Public companies can quickly determine share value using ticker symbols on the stock market. Private startups, though, require the expertise of valuators like BA FL|GA|HI to assess stock value.
Enterprise valuation methods
To determine the current value of a share for a startup, you will need to divide the valuation of the venture by the number of shares outstanding. What percentage of total shares would you have as a percentage of your market value, and what are the tax implications?
The value of your equity is always the number of shares times the price per share. You determine the price per share by dividing the company’s valuation by the total number of shares issued. If the stock multiplier keeps increasing, the expected value rises, and your company valuation confirms this: your potential wealth will increase.
Can you value pre-revenue startups?
Startup valuations are frequently conducted to estimate the total value of new businesses. These valuations differ from appraisals of more established companies, which typically consider profit analysis, taxation, amortization, and interest.
Analysts evaluate a startup’s potential by considering growth rate, market size, marketing effectiveness, burn rate, and customer base rather than solely on revenue and projected earnings.
Calculate the enterprise value of a private company
Analysts should also evaluate the company’s founding team’s strength, as investors are unlikely to invest in a team unprepared for success. A successful team should have diverse skills, experience, and commitment.
Once assessed, the startup’s valuation and the number of shares currently available will indicate the value of your offered shares.
How are pre-revenue startups valued?
There are a variety of pre-revenue valuation methods employed by analysts to assess the value of a startup. Two of the most common methods include:
1. Scorecard Method
However, the management team adjusts the startup’s value based on capital needs, industry competitiveness, and strength.
This method, named after its founder Dave Berkus, estimates the company’s value by assessing five key areas of the startup:
- the soundness of the startup idea,
- the value of the management team,
- Whether the prototype attracts customers,
- the effectiveness of the company’s partnerships and strategic alliances,
- and whether the company has upcoming product launches or expected sales.
The sum of all the values results in the pre-revenue valuation for the startup.
What kind of equity might you be offered, and what is the equity value?
Your offer letter may mention receiving stock grants, options, or a combination. Understanding the type of stock you will receive as part of your compensation package and the funding rounds you are involved in is essential.
Also, inquire whether the valuation of your startup company’s ownership shares is pre- or post-money and whether you receive the same treatment as angel investors and venture capital.
Business owners offering employees stock grants
Early-stage startups often offer stock grants that provide increasing shares as you vest. On the other hand, stock options allow you to purchase shares later at a predetermined price. As an employee, you can buy shares at a discounted price as the company’s value grows during your time with the company.
However, you should know the number of options available, potential equity dilution, the vesting schedule, and what round of funding you are part of to understand when we value equity fully.
You can also read what is discount for lack of marketability since your shares will be in the minority for equity distribution.
How to Value Start-Up Equity Conclusion
Joining a startup with stock options or equity as part of your compensation is exciting. However, it’s essential to do your due diligence and consider the job offer. Ensure you understand the company’s true value and assess if the startup has enough growth potential to justify joining. You should also consider the expected future value.
SBA lenders trust us to value private companies for SBA loans and calculate their enterprise value or total market cap. The market capitalization of a private company can be much trickier than that of a public company whose stock is freely traded daily.
Why Business Appraisal FL|GA|HI.
Reach out to BA FL|GA|HI today to discuss your situation, our expert appraisal services, the business valuation methods we use, and how we can help you assess your compensation offer and value your equity.
Whether pre or post money valuation for startup companies, let us give you a company’s real equity value rather than a guessing startup equity calculator or a meaningless book value.