While stock options continue to lure enthusiastic professionals to start-up industries, the minimal liquidity of private company shares is weighing on the value of such compensation awards. Ever increasing pressure to transact in private securities gave rise to secondary markets where founders, executives, investors, and often employees get an opportunity to cash-out.
Earn-out arrangements are common in corporate acquisitions. Earn-outs may help smooth out bid-ask spreads or incentivize sellers to continue contributing to a newly combined entity. In certain situations, acquired entities face significant milestones where acquirer’s risk becomes prohibitive without some kind of hedging mechanism. Prevalence of earn-outs varies by industry.
Business valuation is often the first step in valuing private company securities, intangible assets or financial instruments. Both income and market-based approaches are important valuation tools, while practitioners find plenty of technical, philosophical and mythological reasons to emphasize one over the other.
In purchase accounting, valuation analysis begins with identifying intangible assets to be recognized apart from goodwill. The criteria for identifying these intangibles is set out in the FASB Accounting Standard Codification Topic 805, Purchase Accounting. The determinations are not always intuitive management’s guidance is critical, especially at the early stages of a project.
Buried deep in the LendingClub financial statements is a curious number. 7.2% is the investment return LendingClub believes their loans should earn for their investors. The 2016 return estimate, the weighted average across all loan grades, is down from 9.0% reported for 2015, presumably due to greater projected losses. It is consistent with the investment
Valuing a stand-alone portfolio holding is like guessing the position of a jumping-jack. Valuing the whole portfolio is more like predicting the position of a rider in the luge. When tracking portfolio performance, valuations can deliver surprisingly precise measurements: #1. Each individual valuation error is less significant at the portfolio level. #2. Valuation errors are
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