Valuing Preferred Shares
Valtech Valuation team recently completed several projects for private equity and venture capital, assisting them to perform preferred share valuations for financial reporting purposes. We are proud to serve as a trusted valuation firm, providing valuable insights to clients in the financial services industry.
Valuing preferred shares issued to PE and VC investors is a complex and nuanced process. It is different from valuing common shares, as they possess unique attributes that differ from common shares, such as priority in claims during liquidity events. This feature renders valuations of preferred shares more intricate compared to valuing common shares.
Building Equity Allocation Model
The equity allocation model is a valuation framework that assigns values to different classes of shares based on their respective rights and preferences. Prior to determining the value of preferred shares through the equity allocation model, we need to determine the equity value of the company in advance.
The equity value of the company can be determined by referencing the latest funding round or utilizing the back-solving method with the option-pricing model. The option pricing model is widely used to allocate equity value among multiple classes of securities within a company’s capital structure. It treats each class of security as a call option on the total equity value of the company. In general, the option pricing model relies on the Black-Scholes model.
In the absence of the latest funding round, we applied market index adjustments to the estimated equity value derived through the back-solving method and determined the equity value as of today. Ultimately, we adopted a second equity allocation model to determine the fair value of the preferred shares as of today.