Thursday, January 28, 2010

Founder Stock Sale and 409A valuation

In today's tough economy, founders of small companies are figuring out a way to get more liquidity for their stocks by partially liquidating their holdings with existing investors. This could mean that founder's common stocks are being bought at the latest preferred stock prices, thereby creating implied valuations that may make the minority common stock price jump by a degree of magnitude. Founders and employees, of course, are alarmed by such big jumps in value and try to find ways to minimize the valuation and tax impacts. In recent conversations with PricewaterhouseCoopers professionals, we have come to understand certain conforming treatments that would be in line with the spirit of the 409A guidelines when valuing such scenarios and may help minimize such impacts for the founders. Contact us for a more detailed analysis of your situation and to discuss our understanding of such situations.

Friday, January 8, 2010

ETF returns and technology sector valuations

AccuServe uses domestic, specialty ETFs focused on technology to assess how these funds performed and arrive at an overarching trend year-over-year for valuations. 1-year returns of such funds, as of December 1, 2009, have ranged between -45.3% and 188.96% with a volume-weighted average of 74.36% return. Clearly, the valuations have improved significantly. The highly traded technology select sector SPDR's 1-year return increased by a large 67.44%. This increase has also translated into improved valuations for private companies.

SEC and private company valuations

The U.S. Securities and Exchange Commission he...Image via Wikipedia

In response to a few requests from clients on what the SEC though about how private companies should be fairly valued, I talked to an official at the SEC about this specific question. The reply was on expected lines: "use your judgment and make sure that observations are justified". Though, we at Accuserve, believed that SEC may not comment that much on private company valuations as these firms were outside their jurisdiction, we wanted to assure some of our clients who wanted to know if the valuations conformed to SEC norms. One of our question was if the SEC had any specific inputs on what approaches are better for private company valuations and, if multiple approaches were used, whether they have any observations on the weightings to be used to get at a single value. The SEC official, again, did not have a comment on any specific approaches or the weight splits to be used across the different approaches. In about 30 minutes of conversation I had with the official, one thing that stood out was the need to take into consideration all circumstances of the company in determining the proper valuation - a well established concept in private company valuations, in any case. So, we at Accuserve, are of the firm view that supportable valuations are those that can be well defended and there is no one single template to valuation.
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