Armanino Blog

When is the Right Time to Consider a New Common Stock Valuation?

by Scott Schwartz
May 19, 2020

The impact of the current global pandemic is being felt by every organization. Whether it’s a business being disrupted by COVID-19 or one seeing more demand for the solutions they offer, things have changed for everyone. So, is now the right time to consider a new common stock valuation?

The answer is: maybe. And it all depends on circumstances. Regardless, as a private company, you have the control.

Here are some reasons a company may want to do a new valuation:

Options as an alternative source of compensation

Many companies that are forced to make pay cuts are looking for creative ways to reward and compensate their hard-working staff. Stock options as an alternative form of compensation can serve as a morale booster and give employees a greater stake in the future of the company.

By executing a new valuation, as of March 31, 2020, for example, companies may be able to reduce the price of their stock, thereby distributing options to employees at a lower cost —providing them with valuable assets with more upside potential once a bull market returns. You might even consider repricing existing underwater options to further incentivize the current employees.

Growth and hiring

Even if you are a company that is seeing growth in these times, the macroeconomic decline in March could be a reason to update your valuation. Remember that valuation experts utilize information that is known or knowable as of the valuation date. Thus, a new valuation and the trough of the market could make your company more attractive if you are hiring.

Of course, if the value has declined, you must also be sensitive to giving new employees options below existing employees. What this means and how you message it is important.

Extending a round of funding from existing investors

If you have taken on more money from existing investors either as a follow-on or an extension of an existing round, you may want to consider a new valuation. Existing investors are already well apprised of the health, viability and roadmap of your company, so this may not be a true indication of fair market value. Further, you may have to give up some additional preferences or warrants as part of the transaction, which would impact the value.

Any time you do an “internal round” there can be complexity in the next valuation, so it’s important to discuss structuring options with a valuation expert in advance so you understand the impact.

Preparing for a merger or acquisition

If it’s appropriate to do so and won’t disrupt or endanger an ongoing M&A process, the market downturn may be an opportune time to execute a new valuation (and repricing or issuance of new options). This allows employees to receive equity compensation at an advantageous price before the company is acquired, as opposed to them having underwater options during a closing and getting minimal or no return as well as missing out on future upside with the acquiror. It is important to have both the employees and company aligned on strategic initiatives and have both participate in the growth and value of the company.

There are times when a new valuation is inappropriate — even in an artificially depressed market:

When entering a new round of funding

This is not the time to try to lower a stock price. Ultimately, the new round is likely going to be the best indication of value, so it is generally not fruitful to do a valuation within close proximity of raising a new round. Although investors (and acquirors) do their own valuation, it may draw unnecessary questions from potential investors as to why you are revaluing the company for compensation purposes prior to the round.

Minor price change or short runway

Sometimes the process of going through a new valuation simply isn’t worthwhile. If it only manages to lower a stock price by an insignificant percentage, that may not be worth the effort. For example, you may not be willing to reprice your underwater options if the price went from $1.10 to $1.03, and you expect to rebound in six months. (Although some companies do.)

Ultimately, this comes down to understanding the qualitative and quantitative factors of how your business has been and is expected to be impacted. The valuation considers not only the macroeconomic downturn, but also your future forecast and expectations. These can be potentially compounding factors that might negatively impact the valuation.

Generally, the longer your expected road to recovery, the more beneficial getting a new valuation now is. If the runway to reaching old highs is a year or more off, a valuation now may be more beneficial than if that’s three to six months away.

These are all important considerations when thinking about a new common stock valuation. Each company has its own unique set of factors to weigh.

You can learn more about Armanino’s valuation services here. And for the latest regulatory updates and more information on keeping your business running through disruption, visit our COVID-19 Resource Center.

May 19, 2020

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