By financial advisors of the company, big consulting firms in general, using all standard indicators + hype measurements, and expectations, compared to others of the sectors.
Given the stakes (tax amounts are huge), you can bet penalties are high if the are wrong. I was at a unicorn that IPOed, FMVs were surprisingly fair, something like, per year: .52, .81, 1.3, 2.7, 4.6, 11, 16, and it IPOed around 22. Progression was quite the same after IPO so it seems pre-IPO FMVs would have been the same in a public market.
based on various inputs, primarily things like the valuation of recent fund raises, looking at publicly traded comparable companies, discounted cash flow analysis, etc.
It‘s never anything else. It rarely fails to amaze me how many people think of market capitalization or valuation as something „official“ or inherent in the company when that is really nothing more than what the market (or for private companies, the highest bidding investor) would pay for it at any given time.
If they use the valuations on which private cash raises are based as an input for the buybacks, it should get close enough to be reasonably fair.
Should usually end up in a slight undervaluation, but that‘s mostly an acceptable tradeoff for the employee for access to short-term liquidity.
You want to build a house when the kids are two, not 18.
To be consistent over time you'd need some tool to objectively measure these valuations. No such tools exist, as everything is smoke and mirrors.
Magic Leap was estimated to be worth 4.6 billion dollars in 2016. It produced literally nothing for the next three years, and ended up producing a mediocre device with no future.
Nikola Corporation was valued at 13 billion dollars as recent as August 2020. They have literally no single product, and there are reports now that they entire company is an extensive fraud.
Uber is valued at anywhere between 30 and 70 billion dollars. It has never been profitable in all of its 11 years, losing up to 8.5 billion dollars a year of investor money going as far as to say "we may never be profitable" in its IPO filing.
This all matters to an employee why exactly? Objective measures have what value? An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market. If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that is good enough for employee stock buy back. Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.
Let's re-read the original question: "How is “fair market” valuation determined for non-public companies?"
The valuation is done using nothing but reading tea-leaves. If we somehow spin this to "This all matters to an employee why exactly", then why not evaluate every single company to be at least 1 billion dollars, this will surely benefit the employees.
> An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market.
On objective measure that no one is selling or buying is still an objecive measure. Tea leaves, smoke and mirrors is not really called a market, but "the forming of a theory or conjecture without firm evidence." aka speculation.
> If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that
Oh look, we've come back to the original question: "How is “fair market” valuation determined for non-public companies?" So, how is it determined?
> Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.
When "Fair market value" is not determined to be and actual fair market value, then it's not "fair market value". It's a lie. Too bad you don't see a problem with that.
Nikola is worth close to $13B right now. It’s a bit above $12B. Why mention August 2020? You mention the recent stock drop cause of fraud allegations, but leave out that it is still at that market cap because it rose 49% earlier in the week when GM invested $2B for an 11% stake and is partnering with them still.
Your Uber valuation numbers are misleading as well. Uber was worth below $45B for a short 4 weeks in mid March to mid April when much of the stock market was down. Otherwise in the past 1.5 years it has actually been between $45B and $80B.
None of this changes anything. I don’t see why the numbers and data need to be presented slanted.
> Your Uber valuation numbers are misleading as well. Uber was worth
You concentrate on numbers in my post and completely miss the point of my post. Uber has lost 20 billion dollars in 11 years of its existence, it has never turned a profit, warned its investors it would probably never turn a profit. It would fold within a day without unlimited investor money. They needed to burn through at least 22.5 million dollars a day in 2019 just to stay afloat. In what world is such a business worth anything but 0 dollars?
> None of this changes anything. I don’t see why the numbers and data need to be presented slanted.
There's nothing slanted in my presentation of data and numbers.
How was Nikola last valued in August? They’re public.
What are you basing the worth and values on? It appears we both were using value/worth to talk about market cap.
How is there nothing slanted about the numbers when the Uber Market cap numbers aren’t correct? You’re lowballing it. And still seeing what you meant by Nikola August valuation being the last time.
"The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts"
The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.
Would you share examples of what you’re describing?
Many private companies are funded by selling equity, which means a buyer was willing to pay a certain price for a portion of the company. FMV of such companies nearly always corresponds to a fraction of the price that the investors paid. Such companies are incentivized to claim as low a FMV as possible without drawing the scrutiny of the IRS, in order to minimize tax liabilities for employees when they exercise stock options.
Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
> Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
A snake oil salesman promises to cure cancer. Investors rush in to buy the salesman for 50 billion dollars. Did the salesman deliberately inflate their FMV? Technically probably not. The end result is the same: the valuation is based on nothing but tea leaves, hype and speculation. That was the original question, wasn't it?
In the examples I provided:
- Magic Leap outright lied about their technology (remember their jumping whale video?)
- Uber would fold within a day without billions in subsidies from investors (they lost something close to 20 billion dollars in the 11 years of their existence?) and is the definition of a non-viable company. Their business model is price dumping (an illegal practice BTW) by losing money.
- Nikola doesn't have a single product. Even their prototypes are highly suspect. They are definitely inflating their FMV as "the global leader of zero-emissions transportation solutions" with exactly zero produced cars
And that's the current story of an increasing number of "tech leaders" and "innovators": indefinitely burn through investor money based on inflated "fair market values" defined by nothing but random coin toss / reading tea leaves / interpreting flights of birds.
That's just how markets work, always have. Nothing special about tech companies, the same phenomenon is seen with anything bought and sold in a free market. Eg. https://en.wikipedia.org/wiki/Tulip_mania
