Start up company
This worked example covers two funding scenarios for a start up company: venture capital funded and founder funded.
Venture capital funded
The valuation concerns a technology based, first year start up company, with no trading history.
The Issued Share Capital (ISC) consists of 2 million shares, 200,000 1p ‘A’ ordinary shares and 1,800,000 1p ordinary shares.
The two classes of shares rank pari passu apart from the ‘A’ shares having the right (under the Company’s Articles of Association) to appoint two directors to the board and rank before the ordinary shares on a return of capital.
The ordinary shares are also subject to risk of forfeiture and pre-emption provisions.
All the 200k ‘A’ ords are owned by an external investor, who recently paid £2m for their 10% minority shareholding, equating to £10 per share.
The company is now looking to grant EMI options over a pool of 10% of as yet unissued shares to its employees. There is currently no sale or flotation in prospect but the company has plans for such an eventuality within the next three to five years.
Valuations are needed for the Actual Market Value (AMV) and the Unrestricted Market Value (UMV) of the ordinary shares, at the date the EMI options are granted. See the Shares and Assets Valuation Manual at SVM110050.
The company has no trading record and the assets largely consist of the balance of the cash from the investment and some intangible assets.
To value the ordinary shares, it may be reasonable to look to the price paid by the investor for their 10% shareholding, as it provides a tangible starting point.
To allow for the lesser share rights of ordinary class of shares (to the ‘A’ ords) a discount of around 30% or more (from the £10 per share paid for ‘A’ shares) might be reasonable depending on the exact fact pattern – indicating an Actual Market Value (AMV) of £7 per ordinary share. For the Unrestricted Market Value (UMV) the risk of forfeiture and pre-emption provisions are to be ignored and so a 10% premium might be reasonable, indicating a UMV of £7.70 per ordinary share.
Founder funded
An alternative start up company scenario might, unlike the above example, involve no external investment, with all the initial capital being provided by the founder shareholders.
For instance, two individuals may set up a company with each subscribing £50,000 of their own money and having 50,000 £1 shares issued to them in return. The ISC would then be a total 100,000 £1 ordinary shares.
The two founders may wish to recruit some key staff to build the business but, as the company could not at that stage afford commercial salaries for the new employees, they may wish to give them EMI options over a pool of 10,000 shares in total.
As in the example above, the company has no trading history and little in the way of assets. In view of this, it might be reasonable to value the minority holdings over which the new employees will hold EMI options, by reference merely to the par value of £1 per share paid by the founders. It might be reasonable to discount the par value if the founders have some preferential rights over and above those of the employees, by virtue of the terms of the Articles of Association.