Earlier this week, I gave some background on the 409A valuation. what it is and how to correctly value options. Lets move on to equity valuations as we continue to investigate the process of formal valuation for your common stock.

What is an Equity Valuation?

Equity value is the total value of a company available to owners and/or shareholders. It includes the enterprise value, cash, cash equivalents, short-term investments, and long-term investments. The equity value also accounts for all ownership interest such as unexercised stock options.

More to the point: an equity valuation is what an investor agrees to and is based on what the investor is willing to pay.

You can calculate your equity value in one of two ways:

• Intrinsic Method Value This method considers the underlying perception of the value of a company. To calculate intrinsic value, you’ll need to take into consideration all aspects of your business.
• Fair Market Value (FMV) This is an estimate of the market value of a business. In other words, it’s the amount that a buyer would be willing to pay in the market-place for your business.

As you can see, the line between intrinsic value and FMV can be blurry and somewhat an issue of semantics. In actuality, these values will often be the same.

To add even more complexity to this issue, there is also the difference of pre-money and post-money valuation.

• Pre-money valuation is the valuation of a company prior to any investment or financing.
• Post-money valuation is the company value after an investment has been made. Essentially, it’s the pre-money valuation plus the amount of new equity.

Factors that Influence the Strength of Your Equity Valuation

Certain sectors are hot at different times and this makes the valuation of different types of companies very high. Hot sector equals strong valuations. Four years ago, clean tech companies were hot. In recent years, social media has been hot, but it seems to be cooling. Today gaming, mobility, and cloud are hot.

Also a factor is the company make-up. Companies led by folks with a proven track record are more likely to get a good valuation. Likewise, your valuation will be high if your company has a great team or the perceived potential for large revenue opportunity.

In future posts, I’ll help you identify if you are ready to invest in a 409A valuation and will give you some tips for determining your valuation.

Questions about equity valuation? Let us know in comments below, or contact Early Growth Financial Services for help valuating your company.

David Ehrenberg is the founder and CEO of Early Growth Financial Services. a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. Hes a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.

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