Case Study – Valuation of Common Stock Due to a Tax Triggered Event

Case Study #16 – Valuation of Common Stock Due to a Tax Triggered Event

Company X (company details removed for privacy purposes)

InteleK was engaged by a stockholder of a tech start-up company to determine the value of their non-preferred shares on a non-controlling and non-marketable basis for a tax triggered event by a change in country of residence.

  • As a tech start-up and due to the early development stage of the company, it was yet to reach positive cashflows and there was uncertainty on when this could be achieved. While the company operates in the SaaS industry, it serves a niche market for the agriculture sector.
  • The company held a financing round in relatively close proximity to the valuation date which can be used as the implied fair market value, however this methodology can also be incorrect, both depending on the case facts.
  • The company has a complex capital structure composed of different series of preferred shares and several options granted with different exercise prices.
  • The valuation is for tax purposes, which means an elevated risk of review and challenge by the tax authority if not done correctly.

Valuation Process:

  • A detailed analysis of the company’s historical and forecasted performance, industry landscape, economic impacts, and comparable companies within the industry and its niche sector.
  • A determination of highly defensible and reasonable assumptions. Specifically, the selection of valuation components that consider the company’s international presence.
  • An analysis of the company’s latest round of financing. Specifically, we reviewed whether the post-money value of the company was a good indicator of its fair market value by considering the investors involved in the financing round.
  • A detailed analysis of the company’s capital structure and capitalization rights summary of different share classes. This considered repayment of debt, allocation of equity to preferred series, options exercised at different strike prices, and cash proceeds.
  • We used the option pricing model to consider several scenarios, both positive and negative, to allocate the company’s equity to its share classes.

Valuation Result:

Our client’s main concern was the tax implications that would result from a valuation based on the post-money value of the company from its latest financing round. Our analysis concluded that for our client’s purposes, the post-money value was not indicative of fair market value and instead an investment value. Our conclusion of value then implied a material reduction in tax liabilities based on fair market value compared to a much higher valuation based on investment value

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