4 ms·
I like this approach, but this sentence gives me pause: "Interpolated Equity requires just one assumption about pre-IPO startups: the value of the equity grows
by bcbrown 12y ago
I like this approach, but this sentence gives me pause:
"Interpolated Equity requires just one assumption about pre-IPO startups: the value of the equity grows at a constant rate between valuation events."
What about cases where the value drops between valuation events? If I was considering an offer, and the equity portion of the offer was valued based on a model that didn't consider the possibility of a drop in valuation, I would discount that equity severely.
Furthermore, how realistic is it to have a constant rate of growth? Perhaps I'm misreading it, but I think it is likely that the rate of growth between Event n and Event n+1 won't be well correlated with the rate of growth between Event n+1 and Event n+2.
- maxcan 12y agoYou're absolutely right. The problem is that there are no market mechanisms at play in between valuations. The goal of IE is to base equity pricing on market mechanisms as much as possible. In the absence of market signals, we essentially choose the simplest, most economically justifiable assumption. The alternative is to simply let the board or management massage the intraperiod valuations as they see fit which is less transparent and yields values that don't necessarily have a market basis. I guess the "real" assumption of IE is that market mechanisms are the fairest, most efficient pricing system.
- maxcan 12y agoJust to clarify, the "constant growth" refers to exponential growth, compounded at a constant rate, like a bank account growing at 2% per year. Its not linear growth.