CHAPTER 3
Valuation Methods versus Allocation Methods Regarding Zogenix
“The valuation was prepared using the guidance in the American Institute of Certified Public Accounting's Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. This process valued our total equity and then allocated it between our common stock and our preferred stock.”
Zogenix 2008 SEC Filing
The epigraph at the start of this chapter, from the Zogenix registration statement filed with the SEC, has three critical pieces of information that impact every investor, founder, and employee of a venture-funded company today:
1. A professional valuation was done, and its preparers relied on guidance from the AICPA's “Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation.”
2. Total equity was valued first.
3. Then the total equity value conclusion was allocated between the other securities.
SEPARATING ENTERPRISE VALUE FROM THE ALLOCATION OF THAT VALUE
The AICPA's Practice Aid in this area lists a handful of methods that can be used to value Total Equity Value as well as a number of methods for allocating that value among different classes of preferred stock, options, warrants, and common stock. Although it's tempting to think that valuing a company in its entirety versus allocating that value to specific securities are distinct processes, unless the tasks are undertaken independently, it becomes an iterative process, where ...
