How to Value Shares in a Private Company

Hi all,

I am trying to work out what to do with some vested options in a private company I recently left. Specifically, I want to work out if I want to exercise all, some or none of the options. If I decided to exercise all, it will cost me approx $USD16000 so it's not a decision I take lightly.

This is the information I have so far:

1. the exercise price per option
2. the number of vested options

My preliminary research on valuing shares in private companies has not yielded much. This is my approach so far:

1. find a company that is a similar size and that conducts similar business
2. find the share price to earnings ratio of the similar company
3. apply the price to earnings ratio of the target company
4. work out if the exercise price is fair

To follow this approach, the missing information I have identified is

• volume of shares in the company
• earnings information (not sure what document I should request to get that)

Any comments on the approach or any additional information I need to make an informed decision?

 

That method is probably a fair start, although it obviously assumes that the two companies are comparable. Note that if one is private and the other is public, then they are not comparable.

There are two standard ways of valuing private companies: multiple of earnings (as you suggest), or book value of assets. Which to use depends on the industry.

In any method, you'll need to see the company accounts, and you'll need full disclosure about debt, any non-balance sheet items, shareholdings, other options, etc. If these things are hard to come by, then some might choose to interpret that as a warning.

It's also worth being aware that shares in a private company are usually *very* hard to dispose of. Maybe that matters, maybe it doesn't. Depends on you, your co-shareholders and the business.

Also be aware of the tax implications. Some vesting mechanisms result in an instant tax liability to you, payable in real money. Others only result in a tax liability at the point you eventually sell the shares at a profit. Some (eek) would have produced a tax liability when the options were granted.

Mostly, consider whether you want to be business partners with the majority shareholders, whether they would treat you as an equal, and whether your interests are alligned.