Equity Shares in Private Company
To understand equity shares in a private company, you first need to have a clear understanding of equity.3 min read
2. Where Are Private Companies Found?
3. What Is the Difference Between Private Limited Companies and Public Limited Companies?
4. Knowing How to Calculate Price Per Share for Private Companies
Updated November 5, 2020:
To understand equity shares in a private company, you first need to have a clear understanding of equity. Equity is the value of shares issued by a private company. The equity itself, generally, references ownership of the company, and it can be expressed in various forms, which are determined by the entity.
When referencing the ownership of a partnership or a limited liability company (LLC), the term used is usually interest. In some cases, it's referred to as a unit. When referencing ownership in a corporation, the term stock is usually used. If you own equity in the corporation, this is known as owning shares of that particular stock.
Types of Equity Securities
Other types of equity securities are referred to as convertible notes, derivatives, warrants, or options. If a certain triggering event were to take place, these equity securities could be converted into actual ownership of the company. Such an event could be a company achieving a milestone. Another example is when a holder of the equity securities performs a certain task.
Where Are Private Companies Found?
A private company that is limited by guarantee, also known as being limited by shares, can be found in many regions, including Wales and Scotland. This type of company is incorporated under the laws of these countries. Certain Commonwealth countries and England, along with the Republic of Ireland, allow some private companies to be incorporated under their governing laws.
When this happens, it means the shareholders of the company have limited liability and the shares themselves are not available to be purchased by the general public; this is unlike what you will find with a public limited company, also commonly referred to as a PLC.
When a company is limited by shares, this means a shareholder has no greater liability to a creditor of the entity than the capital investment that was originally made. Furthermore, it means the shareholder's personal assets are not going to be jeopardized in the event the company is dissolved. However, it does mean the money invested in the entity will not be protected. A limited company doesn't necessarily have to be a private company. There are many public limited companies.
What Is the Difference Between Private Limited Companies and Public Limited Companies?
The disclosure requirements that must be followed by a private limited company are much lighter than the ones that have to be followed by a public limited company. It is because of this that a private limited company will often choose not to offer its shares to the general public, and when it does this, it limits its shares from being able to be traded on a public stock exchange. This aspect is the primary difference between public limited companies and private limited companies.
Many small companies, in an attempt to protect shareholders' personal assets, will incorporate themselves as private limited companies. Since there is no public market for the shares to be traded, calculating share ownership can be difficult for private companies.
Knowing How to Calculate Price Per Share for Private Companies
It is easy to pinpoint the price per share of public companies because the information is easily accessible on the public stock exchange. For private companies, though, various methods can be used to calculate the value of the shares. Common forms of valuation that are used to calculate the value of a private company's shares include:
- Comparing valuation ratios
- Discounted cash-flow analysis
- Net tangible assets
- Internal rate of return
There is one method that is most commonly used to calculate the value of the shares for a private company. This method is very easy to implement. It involves comparing the valuation ratios of the company against the ratios of another company that is comparable. However, the company it is compared to is a public company.
If you want to use this method, you first need to pinpoint one or more companies that are close in size to your company and carry out similar operations. Next, you will take their valuation multiples and compare them to your private company. An example of a valuation you can use is the price-to-earnings ratio, which is PE/E ratio.
Some methods used to determine the price per share for private companies will include a variety of ratios. When using more than one ratio, an average of the ratios can be calculated to determine the overall value of the shares.
If you need help with calculating equity shares in a private company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.