As companies grow and their valuations increase, investors oftentimes wonder why the price per share hasn’t grown in proportion to the increased post-money valuation. In some situations, the price per share only goes up a little, and sometimes it doesn’t go up at all. In this blog, learn more about the different factors that can impact price per share and post-money valuation as well as how equity dilution may impact price per share when companies are fundraising.

Valuation & Price Per Share

What is a Valuation?

Company valuations are used to estimate a business’s intrinsic value and are based on both qualitative and quantitative metrics. Revenue, profits, losses, company assets, and sales growth can all be considered in a company valuation, in addition to qualitative metrics such as the team, market opportunities and competitive advantage, and the size of the company.

However, post-money valuation is not always a good way to calculate company growth  because there typically may be some amount of dilution occurring as a company grows and issues additional shares. During a period of high investor interest, valuations in a particular sector might be inflated, whereas in a “bear” environment, valuations might be more conservative.

Equity Dilution

The primary reason why an increased post-money valuation during an equity round doesn’t necessarily lead to an increased price per share is equity dilution. Equity dilution is the decrease in ownership percentage that occurs when a company issues new shares. As any company grows and issues new shares, some amount of dilution is unavoidable; therefore, the price per share may not necessarily reflect increases in valuation. Equity dilution can happen any time additional shares are authorized and issued. Some examples of this can be seen during fundraising rounds, mergers, and acquisitions, when stock options are exercised by employees, or when convertible debt converts.

Lyft

The increase in post-money valuation may not always correspond with an increase in price, and with Lyft, you can see this in almost every round. Here’s an example of two later rounds from Lyft, the ridesharing company that went public in 2019:

In early 2017, Lyft raised a $600 million Series G round at a $7.5 billion post-money valuation. About six months later, it raised a $1.7 billion Series H round at a $11.7 billion post-money valuation.

Series G PPS: $32.15

Series H PPS: $39.75

% Change in Valuation: 56%

% Change in PPS: 23.64%

This shows a non-proportional increase between the two rounds due to dilution. Although we are only highlighting the changes between these two rounds, similar non-proportional increases between other rounds for Lyft can be seen by reviewing earlier funding rounds.

To learn more about the impacts of dilution on startup investments, check out our blog on ownership dilution.

Other Factors that Can Influence Price Per Share

Fundamental Factors

Fundamental factors relate to the company’s overall financial health, business model, and external conditions like competitors. Investors may want to analyze these factors to determine if shares are fairly priced or under/overvalued. By evaluating these factors, investors can gain insights into a company’s growth potential and risk, helping them make more informed investment decisions.

Fundamental Analysis

When lead investors are negotiating the price per share they are willing to agree to, they typically conduct a fundamental analysis of a company. Fundamental analysis takes a more long-term approach. Value is determined based on a company’s income statement, balance sheet, and cash flow statement. Fundamental analysis can be used to try and understand a company’s intrinsic value.

Management

Similar to the public market, internal factors such as changes in leadership or public scandals can also affect what share price can be negotiated. For example, the departure of key leadership may signal internal distress to investors. The same could be true if a company brings on new executive members who have a positive track record of creating value for shareholders.

Economic & Political Climate

Like the publicly traded market, the private equity market is also affected by the state of the economy. When the economy is expanding, or in a boom, prices are more likely to trend up. When the economy is contracting, or in a depression, share prices may decline[1].

Policy changes that affect taxes on imports and exports, changes in interest rates, subsidies on certain products, wars, and elections are all political factors that can impact the economy, which can hurt or help the bottom line of any business. Political uncertainty adds an element of risk, while political stability tends to lead to a more favorable climate for investors.

Final Thoughts

In conclusion, while a company’s post-money valuation can often increase during equity fundraising rounds, it doesn’t always result in a proportional rise in price per share. As companies issue new shares to raise capital, the ownership percentage of existing shareholders may diminish, which can moderate the increase in price per share despite higher valuations. Additionally, other elements such as market conditions, economic climate, company fundamentals, and even leadership changes can all play a role in determining share prices.

As seen and discussed above, many factors may influence price per share and post-money valuation. While these factors can certainly give you an inclination as to what you could expect, past performance is not indicative of future results.

Want to learn more about valuations and price per share? Check out the following MicroVentures blogs to learn more:

• Understanding Valuation Caps & Conversion Discounts
• Valuations Explained
• Understanding Valuation
• Understanding Pre-Money and Post-Money Valuations
• What’s it Worth? Navigating Inflated Startup Valuations

Are you ready to invest in private companies? Sign up for a MicroVentures account to start investing!

 

[1] https://www.pimco.com/gbl/en/resources/education/recessions-what-investors-need-to-know

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.