Situation: A private company has not issued stock options in over 6 months. The business press highlights concerns over appropriate valuation at the time of option grant. How do you value the stock of a private company to assure that option awards reflect proper company value?
Advice from the CEOs:
- Decide on the objectives of your valuation exercise. These may include:
- A credible valuation to protect the Board from challenges over option valuation.
- A calculation that the company can use quarterly or semi-annually to assess company valuation; possibly something that can be done internally on a quarterly basis, with independent validation annually.
- Given that your concern is option valuation and protection of your Board, they only clean way to do this is to have an outside party perform your valuation. Internal valuations are subject to challenge. Look for reputable CPAs that specialize in private company stock valuation and get quotes from several for initial valuations plus follow-up valuations in 12 months. You may anticipate paying a fee of $12,000 to $15,000+ for this service.
- There are issues that you will want to address in your valuation process:
- A valuation must have a supportable rationale and demonstrate consistency of methodology so that valuations will be performed on a comparable basis year after year.
- You want to see consistency between valuations with your annual financial audits which will reflect company performance.
- There are at least two models that you may follow – a hard model and a soft model.
- The hard model is a one-time valuation based on your financials. This may include historic performance, as well as forward-looking ROI.
- The soft model is based on operational and risk assessment.