How to determine the value of a shareholder’s equity stake?

Shareholder equity valuation is a challenging yet necessary step as it reflects the company’s residual value available to the shareholders. Shareholder equity valuation directly impacts the market perception of a company’s stability and growth potential and is also an indicator of shareholder returns.

As of May 2024, the U.S. equity market had a total equity issuance of $89.7 billion, +74.3% Year over Year (YoY), and an IPO issuance of $14.6 billion, +90.4% YoY. These statistics clearly show the critical role of shareholders in the financial ecosystem. When you hold shares in a company, you basically hold their ownership interest.

To better grasp shareholder equity valuation, this article explains how to calculate equity valuation, best practices for negotiating equity, and the role of professionals in the negotiation process.

How Can a Shareholder Increase Their Equity Stake in a Company?

If you own shares in a company and want to increase your equity stake, consider the following points:

Purchase additional shares

Buying more company shares allows a shareholder to raise their stock position. This is a straightforward approach to increasing shareholder equity valuation. Though this method requires capital investment, it provides an immediate ownership increment proportional to the purchase price. While purchasing additional shares, the shareholder must consider market conditions, share price, and the company’s performance.

Participate in rights issues or secondary offerings

A rights issue is a discounted share purchase offer extended by the company to its current shareholders. At a given time, the shareholder can use the rights to purchase additional shares at a price less than market value. The company starts the procedure by declaring the rights issue and giving details about the subscription cost and the number of new shares to be issued. For every share they possess, shareholders have a set window to purchase a certain number of new shares.

Reinvest dividends through a DRIP

Dividend reinvestment plans (DRIP) are plans that a company offers to its shareholders that let them automatically reinvest their cash dividends in more company shares on the dividend payment date. DRIP is normally available at a discount value other than the current share price. DRIPs ensure an affordable way to increase your equity stake in the company without any brokerage or commission.

Exercise stock options or warrants

A stock warrant is an agreement to purchase shares in a company at a preset price on a predetermined future date (also known as the “expiration date”). Companies issue warrants frequently for investment and commercial financial functions.

A stock option signifies the right to purchase a company share in the future. Warrants and options both vest gradually; often, option holders must wait a full year to receive any rights to their shares. Companies’ next open windows during which holders of options may exercise their right to convert them into shares by paying the strike price, sometimes known as the strike price.

Exercising stock options and warrants can effectively increase shareholders’ stake in the company and, eventually, their equity valuation.

Capitalize on stock buybacks

Though stock buybacks are for companies to reduce the volume of outstanding shares, shareholders can also benefit from it. During a stock buyback, the share price will typically be high due to the reduced supply and improved financial metrics like Earnings Per Share (EPS). As a shareholder, if you do not sell your share during buybacks, you can increase your shareholder equity valuation without purchasing additional shares.

Best Practices for Negotiating Equity in a Private Company or Startup

An increase in the shareholder equity valuation is possible mainly by effectively negotiating your equity. The following are steps to consider for a successful negotiation:

• Understand the equity terms – Gaining knowledge of the provided equity type and its specific conditions is the first step in beginning your equity negotiation. Equity comes in several forms: direct stocks, stock options, and restricted stock units (RSUs). Every kind of share is going to have advantages and disadvantages. Its nature, vesting schedule, and cliff time need analysis to negotiate more effectively.
• Evaluate your leverage – Every individual will have different negotiating power. What determines it? The shareholder’s experience, skills, and the demand. All these significantly impact your leverage in the negotiation process. You have greater negotiation leverage if you offer the company special value or if other firms are ready to hire you. By using this leverage, you can get better equity terms.
• Research market benchmarks – If you know how the relevant company in the market works regarding equity stake, you will be in a better position to negotiate. Investigate the equity compensation norms in other companies for similar positions. You can do it by looking at equity offers for comparable roles in similar-sized companies. Knowing these benchmarks can help you have realistic expectations and ensure you receive a fair deal.
• Highlight your value proposition – Explain the ways you can advance the business with your skills. This could help the company see what you provide and increase the shareholder equity valuation. You can present your prior accomplishments along with potential contributions. Your position in negotiations will be better the more you quantify your worth.
• Time negotiations strategically – Everything in equity negotiations is timing. Start your talks when the business is doing well, such as after raising capital or reaching a significant milestone. Your chances of negotiating a better deal rise when you do so during such times.
• Seek professional advice – Better negotiating, which leads to shareholder equity valuation, mostly depends on professional guidance. Consult an equity compensation-focused lawyer or financial advisor. With their assistance, you better equip yourself to negotiate, make wise choices, and get the best possible offer.

Seeking Professional Advice for Negotiating Equity in a Private Company

When you plan to negotiate for your equity stake in the company, seek advice from financial and valuation experts. They can help you through the following ways:

Importance of consulting financial experts

Financial experts will examine the company’s current affairs, future prospects, and market position. Having this knowledge, you may now investigate the equity offer with confidence. Additionally, financial industry experts are aware of possible risks and traps. Clear potential roadblocks and prepare for the negotiation with this information. They are well-versed in the negotiation process and can help you attain your financial goals.

Role of valuation specialists and advisors

Valuation specialists can give you an accurate company valuation based on its financial data and future projections. This can give you an idea of negotiating equity terms with a higher shareholder equity valuation. Their impartial assessment helps prevent over or under-valuation, ensuring a fair deal for all parties. With a higher shareholder equity valuation, specialists and advisors can provide suggestions and support during the negotiation process.

They can also help compare the target company to others to have a market benchmark useful in negotiation.

How Does a Shareholder’s Equity Stake Affect a Company’s Valuation?

The shareholder equity valuation has a direct impact on the company. The following is how:

• Ownership and control – The higher your shareholder equity valuation, the more you own and control. A larger equity share will influence the corporation’s financial policies and strategic choices. The right to monitor and affect corporate governance will be more yours if you own larger shares in the business.
• Financial strength – Assume that the company owns a significant equity position. How can it profit financially? First, it already has adequate resources; thus, having a solid debt foundation reduces its requirement for loan financing. Another benefit of increased shareholder equity valuation is the company’s greater credit worth, which gives it greater exposure when dealing with suppliers.
• Growth potential – The availability of equity capital is proportionate to a company’s growth potential. Businesses with more equity stake are in a better position to strategize growth initiatives like R&D, expansion, and acquisitions. Because of their perceived stability and ability to achieve long-term growth, investors favor organizations with considerable equity support.
• Return on investment – The return on investment (ROI) matters most from an investment standpoint. Dividend payments are a direct return on investment (ROI) for equity holders. A better return on investment (ROI) for shareholders is possible if the company’s value (profitability) rises.
• Dilution risk – Shareholders should consider the dilution risk even though ROI is good. To increase equity, a company might dilute the ownership percentage of current shareholders by issuing new shares. Because of this, they will have less say and less of a cut of future revenues. Dilution also impacts the Earnings Per Share (EPS). Increasing the number of shares with the same dividend lowers the stock’s value.
• Exit opportunities – The shareholder equity valuation impacts the exit opportunities. Liquidity events like M&A and IPO can have higher returns for higher equity stakes. Another way out for investors is the secondary market for selling shares; however, the price and ease of selling depends on the amount of equity stake.

How Eqvista Can Help Manage Your Company’s Shares

Determining the value of an equity stake is important for both the investor and the company. It involves various equity valuation methods and aims to arrive at an accurate value reflecting the shareholder’s ownership stake. It is also important to consider the number of shares owned, the company’s total equity, and preference, if any. Accurate shareholder equity valuation can also help to make informed investment decisions for negotiation and compliance with regulatory requirements.

Along with all this, the company has to consider issuing and managing the shares effectively. Eqvista’s advanced equity management process can be important in this phase. We not only help with share issuance but also help track and manage equity stakes. By leveraging Eqvista, companies can ensure a transparent and precise handling of shareholder equity. To know more, schedule a consultation call with us today!