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Price per share vs valuation:

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In the past several years, there have been stories of valuations soaring dramatically. But a higher valuation does not necessarily translate to direct benefits for shareholders. Sometimes the excessive dilution makes up for the increased valuation.

Here is a simplified example to illustrate the matter:

Consider Company A with an initial 10 million shares and a valuation of $10 million (price per share = $1). Let’s assume they raise funds at a post-money valuation of $20 million, giving away half of the company. This means the original 10 million shares now represent only half of the company. With a new post-money valuation of $20 million and a new total of 20 million shares, the price per share remains the same at $1.

While the valuation has increased, the average shareholder sees no direct benefit. The media highlights the increased valuation leading to crazy stories about unicorn status and dragon status etc.

Worse happens during down-rounds. See the example for Company B.

Similar math here – companies could continue to grow in valuation, while investors may actually be losing money. Meanwhile, the media continues to tout high valuations. Possibly because the rest is too complex for a story. But investors need to understand.

These examples underscore the importance of scrutinizing the actual numbers and not getting carried away by media reports on fundraising amounts and soaring valuations. Shareholders should delve into details and conduct thorough due diligence before making initial or follow-on investment decisions.

 

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Disclosure: This content is for informational use only and is not a recommendation of a particular investment or investment strategy. Past performance does not guarantee future success. Private Investments are highly risky and illiquid and are not suitable for all investors. There is no guarantee that an investment will be profitable. All investments bear the risk of partial or complete loss of capital.

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