As companies grow and their valuations increase, investors oftentimes come to us wondering why price per share hasn’t grown in proportion to the increased valuation. Sometimes they only go up a little, and sometimes they don’t go up at all. In addition to explaining why this is a common occurrence, we’ll be looking at additional factors that can affect price per share.

Valuation & Price Per Share

The primary reason why an increased valuation doesn’t necessarily lead to an increased price per share is equity dilution. As companies raise more money over time, the number of shares increases and the options pool for employees often increases as well. As any company grows, some amount of dilution is unavoidable; therefore, the price per share may not necessarily reflect increases in valuation.

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Factors that Influence Price Per Share

In addition to equity dilution, there are many other things that can factor into negotiations when pricing a private company’s next round.

Fundamental & Technical Factors

When lead investors are negotiating the price per share they’re willing to agree to, they almost certainly conduct a fundamental analysis of a company. While a technical analysis may be more obviously beneficial in analyzing publicly traded companies, some of the principles may still apply to the private market.

A fundamental analysis takes a more long-term approach. Value is determined based on a company’s income statement, balance sheet, and cash flow statement. Basically, a fundamental analysis is trying to get at what a company’s intrinsic value is.

Technical analysis works under the assumption that there is no need to analyze a company’s financial statements because the stock price is what’s relevant. The primary focus is not on intrinsic value, but rather where the price may be headed. Examples of technical analysis are moving averages, trend lines, and other momentum-based indicators.

Management

As with the public market, internal factors such as changes in leadership or public scandal can also affect what share price can be negotiated. For example, the departure of key leadership may signal internal distress to investors, which could potentially prompt them to sell their shares. The same could be true if a company brings on new executive members that have a positive track record of creating value for shareholders.

Trends & Competition

New technologies that are quickly gaining popularity are also likely well-positioned to negotiate higher prices, as investment banks are looking to spot what’s on the up and up. Current examples would be Uber and Lyft or Bird and Lime scooters.

The Economy

Like the publicly traded market, the private equity market is also affected by the state of the economy in general. When the economy is good, or in a boom, prices are more like to trend up. When the economy is suffering, or in a depression, share prices may decline.

Current Political Climate

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. Generally speaking, political uncertainty adds an additional element of risk, while political stability tends to lead to a more favorable climate for investors.

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Additional Things to Consider

Of course, there is no surefire way to predict how share price negotiations will pan out. And while these factors can certainly give you an inclination as to what you may expect. And as always, past performance may not be indicative of future results.

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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.