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A company raised a recent financing round in the form of Series D preferred stock that has the most senior liquidation preference, a cumulative dividend yield and is participating. The Company required a valuation of the common stock for purposes of evaluating existing warrants and options and also for planned option grants.
VRC was engaged to perform an analysis of the common stock as of a valuation date that was three months after the Series D issuance. Our analysis relied on the Series D financing round to help value the common stock. The various outstanding classes of preferred stock and the contingent equity claims created a complex equity structure. The various economic rights and control features create distinct equity ownership. VRC performed an analysis that considers the individual equity securities as being similar to call options on the entire equity value of the company. Such a model is referred to as the Option Pricing Model (or “OPM”) and is used to provide rigor and support for equity allocation. In light of the Series D round, VRC priced the Series D based on the transaction price, which was considered representative of an arm’s length, sophisticated transaction. Through this process using the OPM, VRC solved for an implied total equity value and the common stock value. A separate discount for lack of marketability (DLOM) was applied, as the Series D price was considered marketable.