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J. Warren
J. Warren, Attorney
Category: Business Law
Satisfied Customers: 2211
Experience:  Experience in general business transaction and formation matters.
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I'd like to learn a bit about exiting a private startup

Customer Question

Hi,
I’d like to learn a bit about exiting a private startup company that I was a main partner in but left years ago.
I inquired about selling my stake to the main owners of the company and they basically said I need to reduce my valuation of the company by 80+% for various reasons. I’d like to know if these are legit reasons and realistic deductions.
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Thanks for your inquiry. We are unfortunately a world apart on the value of the business, and the value of your stock. There are many factors I think your analysis has ignored. Generally speaking, you have not accounted for any of the following important items:
1 Common stock not worth Preferred, no preferences...roughly 50% reduction in value.
2 Non-Marketability of stock (non public company, requires approval from BOD for you to sell your shares) - approximately 30% to 40% reduction in value.
3 Non Control / Minority stake - approximately 10% to12% reduction in value.
4 There’s an additional $500,000 in debt that although has been written off, still needs to be repaid, so this was not on the balance sheet I gave you...this adjustment brings your proposed $4.5M value to $4.0M.
We reviewed your proposal and received feedback from Pillsbury, and they provided us with the general percentage values noted above. Basically when you add all this up...here’s where we are at:
At approximately 4% of the business, your proposed value of $4.0M comes to $160,000
Less 70% for items 1 and 2 above ($112,000) = $48,000.
Less 45% for items 3 and 4 above ($21,600) = $26,400.
$160,000 less the deductions above puts us at about $26,400. After discussing we would be willing to purchase your stock for $35,000.
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Submitted: 7 months ago.
Category: Business Law
Expert:  J. Warren replied 7 months ago.
Hello and welcome to JustAnswer. Please note:This is general information for educational purposes only and is not legal advice. No specific course of action is proposed herein, and no attorney-client relationship or privilege is formed by speaking to an expert on this site. By continuing, you confirm that you understand and agree to these terms.Valuation discounts for the reasons stated are legitimate justifications to arise at a business interest valuation. However, this does not mean that the discounts are reasonable and not negotiable. If I am a seller I am not going to just accept the business valuation without my own independent analysis of a business appraisal used to arrive at the per share price. Also, if there is a partner agreement or shareholder agreement and the value of interest can not be agreed to there typically is a provision which requires the parties to pick a third party to perform an appraisal of the enterprise and arrive a value.Whether these discounts are reasonable or if the share value is reasonable may only be assessed by a certified business appraiser. The discounts listed are typical with a closely held business but must be justified in how the discount percentage was arrived. The discounts listed are within range of what the IRS permits, but this doesn't mean they should just be applied without being supported by a professional appraisal. A company is usually going to be very aggressive with the discounts in order to reduce the price of the redemption amount from the owner. All my best and encouragement. Thank you for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! Please press a positive rating above this message box in the ratings section so I will be paid for my time assisting you on this matter. Pressing a positive rating will not cost any additional money - it is simply the trigger used by Just Answer to pay me for my time (pressing the middle star or the fourth or fifth star on the right are all positive rating buttons).
Customer: replied 7 months ago.
Thank you that is helpful to read!If the company was bought out in full by someone else do you know if they would pay the same price per share for both common or preferred?I was guessing the deductions in the current offer would not apply?
Expert:  J. Warren replied 7 months ago.
Preferred and common shares rarely have the same value. It is not unusual for preferred stock to have no value.
A seller will almost always negotiate that discounts do not apply but the overall enterprise value.
Customer: replied 7 months ago.
Just want to make sure I understand your last response.Are you saying common stock often has no value? (preferred is what they will pay a higher price for)And you're saying that if a company buys them out most likely they will be paying the same price per share regardless if it's preferred or common?
Expert:  J. Warren replied 7 months ago.
No I am sorry, preferred stock typically has a lower value or no value. This is not always the case but is typical. Both common and preferred shares are valued separately and will be included in a purchase if the entire business is sold.Hope this helps.All my best and encouragement. Thank you for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! Please press a positive rating above this message box in the ratings section so I will be paid for my time assisting you on this matter. Pressing a positive rating will not cost any additional money - it is simply the trigger used by Just Answer to pay me for my time (pressing the middle star or the fourth or fifth star on the right are all positive rating buttons).

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