Estimating the fair value of different equity share classes

Estimating the fair value of different equity share classes

Privately held companies often exhibit capital structures that are comprised of several classes of equity (usually common equity and preferred equity). The equity classes enjoy different privileges, with respect to receipt of dividends, rights at liquidation, anti-dilution provision rights, voting rights, etc. 

Evidently, each one of these equity classes has different fair value, dependent on their special individual rights.

We can value the different classes of equity using its proprietary Monte-Carlo simulation-based option pricing model. This model assumes that each one of the equity classes has a residual claim on the firm's equity that can be modeled like a call option.

We can supply a fair value assessment that can be used to quantify the value of holding in a certain class of equity or to ascertain the value of common stock. This can be useful as a base to value employee stock option grants (409A).

In order for us to value equity classes, the firm's equity value, or the value of one of the equity classes must be known. This can be based upon recent transactions in equity or by an equity fair valuation.