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October 24, 2008Market conditions and common stock valuation
No doubt the last few months have been a roller coaster ride in the capital markets. The unprecedented volatility has driven the economy into a state of perpetual discomfort. With the instability has arisen many questions from our private, venture backed companies. How do these times affect our value, and more importantly, our common stock value? The answer is: it depends.
One of the primary inputs in our 409a common stock analysis is determining the current entity value. This can be affected by the multiples in the market place, which in many industries, have decreased anywhere between 10-40%. On the other hand, M&A data may not be as affected as much as trading data. Depending on how these market inputs work in conjunction with one another can certainly affect a specific company's value.
Another factor to impact current value is the company's current financial situation. The outlook for raising capital is grim for the next 12-18 months, causing a stall in new rounds. VC's are requiring much more aggressive terms, both in new and follow on rounds. The results are twofold: 1) if the Company needs cash in the near future, the risk of obtaining the cash at good terms is amplified; and 2) most VC's are telling their companies to buckle down, cut costs and get to cash flow positive. Consequently, many companies have (or are beginning to) revise projections downward and/or create a set of "base case" projections. This obviously would cause fluctuations in value today.
Bottom line is that value has likely changed and in most cases, value has declined. If your board is uneasy about what price to grant options at, seek help. If you grant options at a stale stock price, then your auditor (who has 20/20 hindsight) will likely have issues and questions during the year-end audit.
