“Cheap Stock” or “Stock Option” Valuations
The Valuation Of Shares Or Options To Purchase Shares
Our reports are used by Boards of Directors and management of many companies in connection with contemplated transactions involving the granting of options to certain employees. They are used as a basis for determining the exercise price to be specified in the options, whereby the Boards can establish the exercise price at an amount approximately equivalent to the fair market value of the closely held shares as of the date of the grant of the options.
Foxboro Consulting Group, Inc. (“FCGI”) has provided these services for many dot com companies. We have conducted the appropriate studies to determine the minority interest and controlling interests in the equity of closely held Internet companies. Many of these companies consider future strategic corporate development alternatives including the issuance of shares of common stock to the public, which necessitates the disclosure of compensation payments to officers and employees. These compensation payments often include non-cash amounts and, potentially, include certain consideration paid in the form of options. In the event that the options are issued to certain officers or employees and these options stipulate an exercise price (purchase price) for each share of common stock that is less than the fair market value of the share as of the date of the grant, the difference, if any, would be considered compensation for financial accounting and/or Securities Exchange Commission reporting purposes and may have to be disclosed in the filings for the public offering.
Foxboro Consulting Group, Inc. can provide the fair market value of the common stock and/or stock option on the date of the grant and provide updates of the value quarterly, semi-annually or as needed. In most cases, the succeeding valuations will be at a reduced fee.
Valuing the common stock of a closely held corporation requires consideration of many factors that individually and/or collectively influence value. The FCGI analysis will include, but not be limited to, a review of the following factors which due to the terms and conditions of the aforementioned shares, are typical of a common stock valuation. They are as follows:
- The minority interest character of the subject shares
- Terms and provisions of the shares under consideration
- Restrictions on the transfer of the subject shares
- Transactions in the stock
- The company’s history and management, the nature of its business, and factors affecting its business
- The financial condition of the company, historically and at the valuation date, and an analysis of its assets, invested capital, and book value
- The company’s historical operating results, particularly earnings and factors affecting earnings
- Dividends paid, dividend payout, or absence thereof and dividend-paying capacity
- Relevant economic and industry trends at the valuation date
- The outlook for the company at the valuation date, particularly as to earnings and dividends
- Comparisons between the company and publicly traded companies that could be employed for comparative purposes
- Investor appraisal ratios of the comparative companies
- Marketability of the subject blocks
- Transaction prices in private placements of unregistered shares issued by public corporations
There are three traditional approaches to value — income, market and cost. Each of these approaches may be used to develop an indication of fair market value, however the appropriateness and applicability of each approach varies with the type of securities being appraised. FCGI will utilize methodology, which is most indicative of fair market value.