Private companies are not required to share financial
information. Semil Shah, an investor with Haystack Fund, highlights that
nearly everything about the private markets is opaque, including
what information is shared between companies and their potential
venture investors, and even between the venture firms and the
investors whose money they manage. The lack of disclosure has a
number of ramifications for all parties involved: it can help
entrepreneurs by giving them time to build businesses without
scrutiny; it can create a power imbalance in investor negotiations;
and it increases risk for investors who may not fully understand
what they are buying.
Two separate startup companies are seeking to change this by
providing great valuation resources for startups and investors.
Equidate brands themselves as
"the premier stock market for private tech companies." On
July 25, 2016, the company announced that it would make a host of
data about private companies free and open to the public, drawing
from corporate filings that include the price that investors have
paid to invest in the companies. Equidate also plans to release
tools that shareholders can use to calculate the value of their
private-company stock holdings. As highlighted in a New York
Timesarticle, Sohail Prasad, a
co-founder of Equidate, stated, "We're giving away this
data to help create a more robust market and to give stakeholders
like employees, investors and other shareholders a better way to
understand the value of their stock."
Equidam provides entrepreneurs
with a valuation of how much their company is worth in less than 10
minutes. As described by Yaneev Avital,
the process involves the use of algorithms and an automated process
for early-stage startups. To obtain a rough initial valuation, the
user answers a series of basic questions. The service also provides
the option to include additional details which produce a more
accurate valuation, and can extend all the way to including a full
valuation analysis, a three-year forecast, and many other
parameters investors seek when determining where to invest.
Both startups and would-be investors should be mindful of the
costs and corporate governance issues that can arise when reviewing
the valuation of any company. In January, Equidate bought a
regulated broker-dealer, which means that the deals made on
Equidate must comply with securities rules and have some investor
protection and disclosure. Both startups and investors must be
aware of how the securities laws and regulations may apply both at
the time of initial valuation, and in the future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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