What is Equity Value and How It is Calculated?
Equity means a value of ownership or is used to measure the value of a whole business, a single share, and any other thing that has value in a company.
A company’s equity value is the total value that may be attributed to equity stakeholders. It is also known as the market value of equity or market capitalization.
Equity Value Formula: Sum of Equity Value of Common + Preferred + Options + Warrants + Convertible Notes
Then, let us look into each term in detail.
Note: You must add a shareholder profile to issue shares and securities listed below to calculate equity value. To know all about issuing securities to a shareholder, check out the support article here!
1. Common Stock
It is the type of equity that represents the initial investment made in the company. The holders of these shares have certain privileges.
2. Preferred Stock
A company’s investors receive preferred stock, also known as preferred shares, which yield a fixed dividend.
The difference between common and preferred stock is that common shareholders have ownership privileges and the right to vote in board meetings. While preferred shareholders do not have such privileges.
3. Options
Options are usually given to employees and shareholders of the company. The holder of the option can buy and sell the company’s shares.
After issuing options in Eqvista, it is possible to partially or fully exercise the options that have been issued to a shareholder. To know more about partial and full exercise, refer to the respective support articles.
Once options have been issued to shareholders and vesting schedule has been implemented, they may early exercise those options before vesting is complete.
4. Warrants
It is similar to options and provides the holder the right to buy the shares of the company at a specific or exercise price. In many ways similar to options, warrants are issued by the company itself, not by a third party.
5. Convertible Notes
It is a form of short-term debt that has an option to be converted into company shares. The conversion typically takes place when a debt matures or when a new investor enters the business.
A conversion note is used by investors for financing companies that do not have company valuation. In further financing rounds or exit of the company, the holder can choose to collect the note amount or convert it into shares.
EQUITY VALUE CALCULATIONS
The equity value calculation is based on the current FMV for all grants which is the Fair Market Value from 409A valuation of the closest date to today’s date. To request a 409A valuation, check out our support article here!
Suppose a company Core Tech has issued some shares and different kinds of security namely options, warrants and convertible notes to shareholders.
There are two scenarios in which equity value can be calculated:
SITUATION 1 – FMV IS PRESENT
Common Stock
- The equity value of each grant will be FMV * Share Amount
- Equity Value of Common Stock – The sum of the equity value of all common grants owned by the shareholder
Preferred Stock
- If FMV is greater than Share Price (FMV > Share price), the equity value of each grant will be FMV * Share Amount/ Otherwise, Share Price * Share Amount
- Sum of Equity Value of Preferred Stock – The sum of the equity value of all preferred grants owned by the shareholder
Options
Condition 1: FMV is greater than Exercise Price (FMV > Share price),
- Then, the equity value of each grant will be (FMV – Exercise Price) * Option Amount
Condition 2: FMV is less than and equal to Exercise price (FMV <= Share price),
- Then, the equity value of each grant will be zero.
The sum of Equity Value of Options – The sum of the equity value of all option grants owned by the shareholder
Warrants
Condition 1: FMV is greater than Exercise Price (FMV > Share price),
- Then, the equity value of each grant will be (FMV – Exercise Price) * Warrant Amount
Condition 2: FMV is less than and equal to Exercise price (FMV <= Share price),
- Then, the equity value of each grant will be zero.
Sum of Equity Value of Warrants – The sum of the equity value of all warrant grants owned by the shareholder
Convertible Notes
- The equity value of each grant will be Principal + Interest.
- Sum of Equity Value of Convertible Notes – The sum of the equity value of all convertible notes owned by the shareholder
Finally, to calculate Equity Value, we take the formula:
Sum of Equity Value of Common + Preferred + Options + Warrants + Convertible Notes
SITUATION 2 – NO FMV
Common Stock
- If no FMV exists, the equity value of each grant will be Share Price * Share Amount
- Equity Value of Common Stock – The sum of the equity value of all common grants owned by the shareholder
Preferred Stock
- If no FMV exists, then the equity value of each grant will be Share Price * Share Amount
- Equity Value of Preferred Stock – The sum of the equity value of all preferred grants owned by the shareholder
Options
- If no FMV exists, then the equity value of each grant will be zero.
- Equity Value of Options – The sum of the equity value of all option grants owned by the shareholder
Warrants
- If no FMV exists, the equity value of each grant will be zero.
- Equity Value of Warrants – The sum of the equity value of all warrant grants owned by the shareholder
Convertible Notes
- The equity value of each grant will be Principal + Interest.
- Equity Value of Convertible Notes – The sum of the equity value of all convertible notes owned by the shareholder
To calculate Equity Value, we take the formula:
Sum of Equity Value of Common + Preferred + Options + Warrants + Convertible Notes
To know more about Eqvista, check out our support articles and knowledge base. For further queries, contact us today!
