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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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How do you value a company as to shares to allocate when you

Customer Question

How do you value a company as to shares to allocate when you are filling out the incorporation documents and you’re share allocating to yourself, key employees, etc., such as when you look up Facebook, Microsoft, and other big companies having 30 to 60 million shares just for the CEO since my initial first-round funding will be around $40 million when all contracts are signed and there are no existing debts, and when trying to allocate the right amount for the investors since we I am changing it from a loan to offering stocks instead and what type of stocks to offer?
Submitted: 8 months ago.
Category: Finance
Expert:  BK-CPA replied 8 months ago.

Hello and thank you for your question.

It's a little too early to place a value on anything prior to deciding what kind of stocks you are offering. In general you can have common stock or preferred and with or without voting rights. There are of course more nuances as the sky is somewhat of a limit.

I'm not sure what form you are trying to fill out. On a tax return or the company's financial statements you generally aren't concerned with what individual investors have paid for their stock as you only need to know what they paid in total to the company (usually through a broker or exchange agent that will basically buy the stock in bulk and then resell for publicly traded companies via an initial public offering). Anything they pay in excess of the par value of the stock is called additional paid-in capital and it all just gets summed up on the company's balance sheet. Individual investors need to know what they have paid so they can calculate gain or loss when selling their shares, etc., but this information does not appear on the company's tax return or financial statements (imagine if Microsoft had to report on its tax return or in its financials every time someone bought or sold a share on the open market...).

The company does need to know what the value of the stock is if it is issuing the stock as compensation to employees and officers. For that you need a business valuation in general and would take into account things like whether the stock is preferred or has voting rights, etc. For publicly traded stocks this is much easier because you can check what the current market price is whenever you want. For companies that are not publicly traded, private valuation techniques are necessary and these can be very complex... In that case you need to go to your professional counsel and ask them why in the world they referred you to JustAnswers for this sort of question.