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What is your company’s true “Valuation?”

A recent headline from “All Things D” declared: “Pinterest Completes $200 Million Funding at $2.5 Billion valuation.” $2.5 Billion is an impressive number we’d like to dwell on for a while. According to TechCrunch, this new round of funding brings the total amount invested in Pinterest to $338 million. Without a doubt, the return is great. The question is whether the $2.5 billion number is even remotely an accurate reflection of the value of Pinterest’s business?

Headline grabbing valuations are a result of multiplying the price per share paid in the most recent round by the number of outstanding shares of equity. However, not all shares of stock are made equal. Preferred stocks are loaded with rights that put them ahead of common stock. Such features as liquidation preferences, participation rights, anti-dilution, or voting rights make preferred shares more valuable. As an example, if Series D was priced at $10/share, a share of common stock may still be worth no more than a few dollars.

The true value of Pinterest is impossible to estimate without detailed knowledge of its capital structure and financial information. Even the most mechanical (and thoroughly unintuitive) option pricing method would require knowing the rights and preferences of each equity class, the number of shares, warrants and stock options.

The good news is that as a company approaches an IPO, values of different classes of shares converge and a $2.5 billion back-of-the-envelope calculation becomes more relevant. However, an established business with limited short term IPO aspirations would require much more careful valuation.

More Updates

Technology Valuation: US GAAP View

It is hard to underestimate the importance of technology in modern enterprises.  From legacy manufacturing to artificial intelligence and life science breakthroughs, technology plays an ever-increasing role.  However, the need to assign a specific value to it may arise only when the enterprise is faced with a strategic transition.  A merger or an acquisition is one such event.

Your Valuation Needs Income Approach

The value of any business is defined by the amount of future cash flows it can generate.  The three basic valuation methods are the income approach, the market approach, and the cost approach.   Only the income approach directly addresses the question of value.  It is the first on the list of recommended methods in all guideline literature.  In fact, the

Intellectual Property, Goodwill, and Other Intangible Assets

The predominant amount of S&P 500 value comes from intangible assets and goodwill (“Intangibles”) of the underlying companies. It is no surprise that patents and brands are more valuable than desks. Understanding the components of intangible value is of great relevance to tax authorities and financial stakeholders.

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