When valuing an equity interest in an early stage technology or life sciences company, valuation practitioners need to reflect the impact of future rounds of equity financings, writes Carl Saba (Burr Pilger Mayer) in his recent white paper Valuation Challenges for Early-Stage Companies: The Need for Future Equity or Debt Contributions Introduces Complexities Into the Business Valuation Process.
Saba suggests that practitioners address this variable by answering the following questions, at a minimum:
- What is the likelihood that the subject company will need additional financing in the future, and if so, when and how much?
- Will the financing take the form of preferred equity, debt, or some type of hybrid debt/equity security?
- Will the future financing be dilutive to existing shareholders, at a fair value (neutral), or possibly overpriced (will enhance existing shareholder value)?
- Are the terms of the future financing known or unknown?
- Are there any circumstances where the future financing can be ignored in a valuation model?
- What is the most appropriate way to model a future financing based on facts and circumstances, and the specific valuation techniques being applied?
Click here for the white paper.
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