Thursday, October 9, 2008
Value allocation in a water fall structure
The main issue is that companies calculate per share values without taking into account the waterfall structure i.e. your post-money valuation has to be allocated according to the waterfall model to arrive at a per share value for the new preferred round. You need to first arrive at a company valuation and then allocate that to different shareholder classes per the allocation rights. Right now the pre-money valuation is arrived at by assuming a per share value for the new round and multiplying that per share value for all existing shares, which is doing things in a reverse way, and is not correct as shareholder classes are not equal and each class will have a different per share value. Also, companies should always be valued at the enterprise level and then the value of each class arrived at. This method of arbitrarily assigning a per share value to the new preferred round and then arriving at the pre-money based on that is not quite correct. This is why there is a divergence between your calculated per share value and ours, which takes the waterfall structure into consideration, and correctly allocates the value. There is a difference between allocating value and just dividing up the value between all classes assuming a fully converted, pro rata basis.