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Aug 9, 2016
Great Valuation Resources for Startups and Investors
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.
1) 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 Times article, 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."
2) 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 Aird & Berlis LLP Startup Team has a wealth of experience assisting startups with a range of activities including securities law compliance, funding, incorporation, shareholders agreements, protecting intellectual property and software agreements. For more information, please contact any member of our Startup Team.