The value of a company share
January 12, 2010 11:36 AM Subscribe
How do I find the value of my shares in a privately owned company?
I work for a small, privately owned company. As part of my compensation, I get a number of shares in the company. I am considering leaving this company, but a factor in this is the value of the equity that I have in it. I'd rather not have the company know that I am considering this until I decide to leave (or not), so how do I get a rough idea for the value of this share?
The company is privately owned, with no venture capital or other large capital investment. I am not involved in the financial side of the company, so I don't have any access to the finances.
I work for a small, privately owned company. As part of my compensation, I get a number of shares in the company. I am considering leaving this company, but a factor in this is the value of the equity that I have in it. I'd rather not have the company know that I am considering this until I decide to leave (or not), so how do I get a rough idea for the value of this share?
The company is privately owned, with no venture capital or other large capital investment. I am not involved in the financial side of the company, so I don't have any access to the finances.
You may want to use the excuse of "estate planning" or "writing a will" to get this information from your company.
posted by bottlebrushtree at 11:48 AM on January 12, 2010 [2 favorites]
posted by bottlebrushtree at 11:48 AM on January 12, 2010 [2 favorites]
Someone who knows more about this may correct me, but I believe that as a shareholder, you do, by definition, have access to the finances, at least in some limited form, in part, to do just this: appraise the value of your own holdings.
posted by craven_morhead at 12:05 PM on January 12, 2010
posted by craven_morhead at 12:05 PM on January 12, 2010
We (and you) need more information to answer this question. First of all, your company grants you straight-up, vested, unrestricted stock as part of your comp? That's weird. If that is true, your question might become a lot simpler. If you are paid in part in stock, you pay income taxes on that stock, based on its value, so your company has to give you some sort of estimate of its value to use for your tax purposes, and they have to have the same estimate for calculating their own tax liabilities.
However, due in part to this and other issues, companies rarely pay people like this. Usually you get options or restricted stock or something like that, and the specific details of the option plan, vesting schedule, or restrictions on your stock class will be a huge determinant in determining the value of your equity.
Also, we need to know what sort of 'value' definition you need. There are a lot of ways to value a company, and it depends on what you're thinking about.
Anyway, long story short, double check your comp agreement on the stock issue. if you are actually paid plain-old common stock, say your accountant needs a valuation for it for tax purposes, that's a perfectly reasonable cover. More likely, you're going to need your option plan. It's entirely possible that if you leave, your position becomes nearly worthless: unvested stock/options revert to the company, company gets right of first refusal on vested stock/options (possibly at a de minimus value), and if you are compensated via a typical incentive stock option plan, your options will expire ~90 days after leaving the company, at which point you will have to either let them expire, or exercise them (meaning you have to actually buy the stock from your company. People rarely want to give money to the company they are leaving. I'm guessing from your question that you do not have a contract that addresses the company covering option exercise or equity-compensation-related taxes in the event you leave.)
posted by jeb at 12:06 PM on January 12, 2010
However, due in part to this and other issues, companies rarely pay people like this. Usually you get options or restricted stock or something like that, and the specific details of the option plan, vesting schedule, or restrictions on your stock class will be a huge determinant in determining the value of your equity.
Also, we need to know what sort of 'value' definition you need. There are a lot of ways to value a company, and it depends on what you're thinking about.
Anyway, long story short, double check your comp agreement on the stock issue. if you are actually paid plain-old common stock, say your accountant needs a valuation for it for tax purposes, that's a perfectly reasonable cover. More likely, you're going to need your option plan. It's entirely possible that if you leave, your position becomes nearly worthless: unvested stock/options revert to the company, company gets right of first refusal on vested stock/options (possibly at a de minimus value), and if you are compensated via a typical incentive stock option plan, your options will expire ~90 days after leaving the company, at which point you will have to either let them expire, or exercise them (meaning you have to actually buy the stock from your company. People rarely want to give money to the company they are leaving. I'm guessing from your question that you do not have a contract that addresses the company covering option exercise or equity-compensation-related taxes in the event you leave.)
posted by jeb at 12:06 PM on January 12, 2010
Someone who knows more about this may correct me, but I believe that as a shareholder, you do, by definition, have access to the finances, at least in some limited form, in part, to do just this: appraise the value of your own holdings.
You have this if you own stock in companies subject to certain regulatory regimes (e.g. public companies), and your specific company bylaws may require the company to make some sort of quarterly/yearly financials available to investors, but in the general case, no, owning some stock in a small, privately held company does not give you access to the books sufficient to really value the company from the bottom up.
Even for people that make these kinds of investments as a matter of routine (private equity shops, venture capital funds, etc.) marking these kinds of positions is something of a black art.
posted by jeb at 12:08 PM on January 12, 2010
You have this if you own stock in companies subject to certain regulatory regimes (e.g. public companies), and your specific company bylaws may require the company to make some sort of quarterly/yearly financials available to investors, but in the general case, no, owning some stock in a small, privately held company does not give you access to the books sufficient to really value the company from the bottom up.
Even for people that make these kinds of investments as a matter of routine (private equity shops, venture capital funds, etc.) marking these kinds of positions is something of a black art.
posted by jeb at 12:08 PM on January 12, 2010
I second craven_morhead: as a shareholder you should have the right to access the yearly finance reports. This will list the number of existing shares, current revenue and planned future cash flow, which will allow you to estimate the value of each share.
posted by knz at 12:09 PM on January 12, 2010
posted by knz at 12:09 PM on January 12, 2010
There are lots of books on the subject which should be easily findable with some googling or the help of a librarian. Typically it's based on a ratio of revenue, discounted future cash flows or possibly asset value depending on the exact type of business.
This type of approach could, theoretically, if you had access to the books help you put a value on the company, and if you held straight-up common stock you could calculate some value for it, but the value would not really be useful for many purposes. A lot of this in a small private company is rule-of-thumb based. Say like, car washes generally sell for 2-3x sales (I have absolutely no idea if this is anywhere close to true), if you knew your top line, and you knew your percentage, you could develop some value for your stake in the car wash, but there isn't really a very liquid market for .05% private placements in car washes, so actually finding a buyer at this price would basically be impossible. This is why the type of value you are trying to calculate is so important. In an actual cash-raising situation, this position is basically worthless. If the position pays a dividend to you, you can make some value to you based on the NPV of those future cashflows. If you tell the IRS its worthless cause you can't sell it, they are going to disagree vociferously, but you see what I'm getting at?
This is also related to my earlier point about the restrictions, etc. Those restrictions are going to be largely geared towards limiting the secondary market for your equity, which for one definition of value (the 'how much cash can I convert this to today' definition), destroys it.
Also, this is a shot in the dark, but many people who work for small privately held companies that use equity compensation and post on internet forums about same work for high-tech companies, specifically early stage ones. DCF-based models for these types of companies are useless, because the models are so inaccurate. Asset value models are also basically impossible to build in any real way, because the assets are all brand and IP, not things with liquid markets or discoverable prices. This is why VC firms use backwards valuation all the time: "you need X money, we want Y percent, so your valuation is Z."
Ok, cutting myself off now. Hope this wasn't more confusing than helpful.
posted by jeb at 12:15 PM on January 12, 2010
This type of approach could, theoretically, if you had access to the books help you put a value on the company, and if you held straight-up common stock you could calculate some value for it, but the value would not really be useful for many purposes. A lot of this in a small private company is rule-of-thumb based. Say like, car washes generally sell for 2-3x sales (I have absolutely no idea if this is anywhere close to true), if you knew your top line, and you knew your percentage, you could develop some value for your stake in the car wash, but there isn't really a very liquid market for .05% private placements in car washes, so actually finding a buyer at this price would basically be impossible. This is why the type of value you are trying to calculate is so important. In an actual cash-raising situation, this position is basically worthless. If the position pays a dividend to you, you can make some value to you based on the NPV of those future cashflows. If you tell the IRS its worthless cause you can't sell it, they are going to disagree vociferously, but you see what I'm getting at?
This is also related to my earlier point about the restrictions, etc. Those restrictions are going to be largely geared towards limiting the secondary market for your equity, which for one definition of value (the 'how much cash can I convert this to today' definition), destroys it.
Also, this is a shot in the dark, but many people who work for small privately held companies that use equity compensation and post on internet forums about same work for high-tech companies, specifically early stage ones. DCF-based models for these types of companies are useless, because the models are so inaccurate. Asset value models are also basically impossible to build in any real way, because the assets are all brand and IP, not things with liquid markets or discoverable prices. This is why VC firms use backwards valuation all the time: "you need X money, we want Y percent, so your valuation is Z."
Ok, cutting myself off now. Hope this wasn't more confusing than helpful.
posted by jeb at 12:15 PM on January 12, 2010
I second craven_morhead: as a shareholder you should have the right to access the yearly finance reports. This will list the number of existing shares, current revenue and planned future cash flow, which will allow you to estimate the value of each share.
No. As a general rule, this only applies to public or otherwise-regulated companies. Your company may have some bylaws or a shareholder agreement that provides for something like what you're suggesting, but for a small, privately-held company I would say it's unlikely.
posted by jckll at 12:15 PM on January 12, 2010
No. As a general rule, this only applies to public or otherwise-regulated companies. Your company may have some bylaws or a shareholder agreement that provides for something like what you're suggesting, but for a small, privately-held company I would say it's unlikely.
posted by jckll at 12:15 PM on January 12, 2010
BTW even if you have access to the companies finances you only get some idea of what the value of the company is.
But even then equity in a privately held company (or public for that matter) is only worth what someone is willing to acquire it for. If you can't sell you equity its currently worth nothing.
posted by bitdamaged at 12:51 PM on January 12, 2010
But even then equity in a privately held company (or public for that matter) is only worth what someone is willing to acquire it for. If you can't sell you equity its currently worth nothing.
posted by bitdamaged at 12:51 PM on January 12, 2010
You probably are looking for a "fair market value" for your shares (although the specific agreement under which you received the shares may dictate another type of "value"). This is not the same as "book value," which is what the company's books (hence the name) will give you. First of all, take a look at the documents which accompanied your shares when you received them. If you're lucky, those documents will define how the shares are to be valued in certain circumstances, such as when you leave the company. If they don't, then you need to get the shares valued by a professional, who can value the shares according to the appropriate method for the specific business involved (asset method, income method, market approach, excess earnings/goodwill approach), as well as discounting the shares for lack of marketability and minority control.
To understand the general concepts involved, I recommend:
"Valuing a Business: The Analysis and Appraisal of Closely-Held Companies" (McGraw-Hill); Valuing Small Businesses and Professional Practices" (McGraw-Hill); and, "The Lawyer's Business Valuation Handbook (ABA). Each of these books is authored by Shannon Pratt, who is pretty much recognized as one of foremost experts on the subject of business valuations. (The Lawyer's Business Valuation Handbook is written if fairly-plain English, so if you feel comfortable with basic accounting terms, this may be the place to start).
FWIW, attempting to value shares of small, closely held companies often ends up as an exercise in opinion, subjective judgment, and rules of thumb. This is why it often leads to litigation. It's an art, not a science. Oh, and it can be expensive.
posted by webhund at 12:55 PM on January 12, 2010
To understand the general concepts involved, I recommend:
"Valuing a Business: The Analysis and Appraisal of Closely-Held Companies" (McGraw-Hill); Valuing Small Businesses and Professional Practices" (McGraw-Hill); and, "The Lawyer's Business Valuation Handbook (ABA). Each of these books is authored by Shannon Pratt, who is pretty much recognized as one of foremost experts on the subject of business valuations. (The Lawyer's Business Valuation Handbook is written if fairly-plain English, so if you feel comfortable with basic accounting terms, this may be the place to start).
FWIW, attempting to value shares of small, closely held companies often ends up as an exercise in opinion, subjective judgment, and rules of thumb. This is why it often leads to litigation. It's an art, not a science. Oh, and it can be expensive.
posted by webhund at 12:55 PM on January 12, 2010
Asset value models are also basically impossible to build in any real way, because the assets are all brand and IP, not things with liquid markets or discoverable prices.
You are absolutely correct but without knowing what industry the OP is in you can't say there isn't some simple model out there. Maybe he's buying into a family retail business with sweat equity in which case the valuation models for retail operations are reasonably well understood.
Anyway, there's not nearly enough info to answer the question, so the answer is to talk to a professional and get the financial details of the business.
posted by GuyZero at 12:55 PM on January 12, 2010
You are absolutely correct but without knowing what industry the OP is in you can't say there isn't some simple model out there. Maybe he's buying into a family retail business with sweat equity in which case the valuation models for retail operations are reasonably well understood.
Anyway, there's not nearly enough info to answer the question, so the answer is to talk to a professional and get the financial details of the business.
posted by GuyZero at 12:55 PM on January 12, 2010
As a few people have mentioned there isn't really enough information to answer the question accurately. However, the very short answer to this question is that the shares are worth whatever you can persuade someone to pay for them. That figure is going to depend on a number of factors including how successful the company is, how desperate you are to sell them, when you are selling them and who you are selling them to.
Definitely get some professional advice.
posted by jonnyploy at 1:09 PM on January 12, 2010
Definitely get some professional advice.
posted by jonnyploy at 1:09 PM on January 12, 2010
You are absolutely correct but without knowing what industry the OP is in you can't say there isn't some simple model out there. Maybe he's buying into a family retail business with sweat equity in which case the valuation models for retail operations are reasonably well understood
Yeah, totally. Sorry, I wrote that unclearly, I meant the asset valuation impossibility part to apply only to to the early-stage tech company case. I was bringing up the car wash example as a possible example of the other case.
posted by jeb at 1:40 PM on January 12, 2010
Yeah, totally. Sorry, I wrote that unclearly, I meant the asset valuation impossibility part to apply only to to the early-stage tech company case. I was bringing up the car wash example as a possible example of the other case.
posted by jeb at 1:40 PM on January 12, 2010
Mod note: This is a followup from the asker.
Thanks for the thoughts. To clarify some of the issues: The stock is granted through a Phantom Stock Plan. I don't have the plan document to hand, but I believe the value is based on a 'fair market appraisal' of the company, which is where the issue lies. It is vested over three years, but I have been there for long enough that I am fully vested. The business is a new media company.posted by cortex (staff) at 4:04 PM on January 12, 2010
In my past experience with employee stock plans for private companies (software specifically), the management brings in a third-party to evaluate the "fair market value" every so often and basically you get what you get. Not much room for argument. it's usually some combination of previous financing rounds and some number that will make the next financing round work, per jed's comments. But it's not a value that's fixed by management, not officially anyway.
posted by GuyZero at 4:12 PM on January 12, 2010
posted by GuyZero at 4:12 PM on January 12, 2010
If I paraphrase you questions as "are my shares worth enough to make it worth my while to stay?". Then the issue is not so much what they might theoretically be worth now (for tax purposes or whatever), but how much cash can you turn them into and when will you be able to do that?
Given that this is a Phantom Stock Plan, it's not really shares at all, its more like a bonus tied to the value of the company (or the appreciation in value of the company). In this case, I think your plan document should explain exactly how the value will be calculated as there doesn't seem to be a "standard" phantom stock plan, there are many ways of setting up how much bonus will be paid. There is some more information here.
posted by Long Way To Go at 5:03 PM on January 12, 2010
Given that this is a Phantom Stock Plan, it's not really shares at all, its more like a bonus tied to the value of the company (or the appreciation in value of the company). In this case, I think your plan document should explain exactly how the value will be calculated as there doesn't seem to be a "standard" phantom stock plan, there are many ways of setting up how much bonus will be paid. There is some more information here.
posted by Long Way To Go at 5:03 PM on January 12, 2010
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posted by GuyZero at 11:40 AM on January 12, 2010