How are investment funding valued when invested in a company before it goes public?


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Is there are particular method for banks or individuals when their capital is invested in the company before going public.

To make it more clear how was Facebook Inc. and Goldman Sachs deal valued at $50Billion and General Atlantic bought 2.5 Million Shares at a valuation of $65 Billion.

Does it mean Goldman Sachs will have returns double of its investment or more with time or immediately after it goes public?.Is this applicable for individuals too?
If some high net worth individual would have invested in Facebook Inc. had it been valued $50Billion or if someone bought 2.5 Million shares at $65 Billion valuation.

Investing Investment Valuation

asked Oct 10 '11 at 21:11
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Himanshu Prasad
51 points

1 Answer


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Valuing companies is more of a black art than a science.

The valuation is made up at the time of purchase, thus in the facebook case, the longer they wait the more it costs because facebooks value increases daily.

The variables they use to value companies changes based on the business model of the company, the size of its user/client base, in facebooks case the "potential earnings" if they were to cover it in advertising, the emerging threats like google+ may devalue it a little in the long term, the work in progress for other products and IP they own, value of the propery they own ... and lots of other things.

Basically they try to put a price tag on each of these items, then they try to guess where it will be in 2 years for each of those items ... and they come up with a very big number that has lots of justifications behind it but no clear science ...

The next valuation will have a range of additional factors to consider based on where they find themselves now, like valuation pre and post Google+.

How your senario plays out :

Each time someone buys in (company or individual) that sets a "line in the sand", someone was willing to pay that much, which is your best measure of the value of the shares.

If the company is divided into 10M shares and you have a valuation of $10M then you have $1 per available share. Lets say you have 100,000 shares and you paid $100K for them.

If 2 months later someone buys 100K shares for $2 each, then the rest of the shares are assumed to be worth at least that much, you still have 10M total shares available, and you still have 100,000 of those shares but they are now worth $200,000 and the total share holding is therefore worth $20M.

Each "buyin" effectively resets the bar and gives a new line in the sand.

When the company lists publically all the investors that bought in over time get to sell as many shares as they want to in order to make their money ... or they can hold onto the shares hoping the climb further in value.

THUS it depends when Goldman Sachs choose to sell their shares as to how much money they will make ... at this point its looking pretty good for them.

They will probably sell enough shares to pay back loans and other debts but keep a reasonable percentage holding in the company as it looks good for their brand name to say "we own a large holding in facebook".

answered Oct 11 '11 at 09:55
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Robin Vessey
8,394 points

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