3 ms·
Why does selling a 10% chunk of a company value the remaining 90% at the same price?
by nodata 15y ago
Why does selling a 10% chunk of a company value the remaining 90% at the same price?
- barredo 15y agolayman: the 800M$ funding & 8B$ valuation numbers affect each other. It woulnd't be raising 800M$ if not valued at 8B and it wouldn't be valued at 8B$ if the funding round wasn't 800M$
- damoncali 15y agoIt doesn't. It's just an implied valuation based upon simplistic math. For example, suppose that $800M had a 1x liquidation preference plus a modest hurdle rate (say its 7%). That investor makes good money if Twitter gets sold for (1.07 x $800M) $856M - a far cry from $8B. The risk of such an investment going negative is quite low (relatively speaking), as would be the investor's cost of capital. I doubt the seed investors would look at such a sale positively. That is a grossly oversimplified version of what can happen (I have no idea what the terms of the real investment are - I'm just making up a for-instance). But the larger point is that you are correct, when you are dealing with preferred stock and other complicated securities, the implied valuation is a bit of a joke. You have to look at the value of all of the various tranches of securities, each of which is impacted by the others.
- jamiequint 15y agoThis is only true if the shares sold in this round participating preferred and earlier investors were not entitled to money back in such a sale, I doubt either is the case here.
- damoncali 15y agoThe larger point is that 4th grade percentage math is inadequate to value preferred stock. Change the example to one you like if you find mine too simplistic.
- rokhayakebe 15y agoThey value the entire chunk, then base the 10% on it. Your question makes it sound as if they said 10% is worth 800M, then 90% is worth 9 times as much. The logic would be 100% cost 8B, so 10% cost $800M.