Equity Value
Equity value is the value of a company's shares — what its shareholders receive when it is sold, or what the market says they hold, in the case of a listed company. It is enterprise value plus cash and minus debt, and in a deal it is the price actually paid at completion after the bridge from the headline offer has been agreed.
- Also known as
- Market capitalisation, Shareholder value, Equity purchase price
- Used at
- the completion of a deal (the cheque), and in the term sheet of a funding round (the valuation)
- Formula
- enterprise value + cash − debt − debt-like items ± working capital adjustment
- Listed companies
- share price × shares in issue, i.e. market capitalisation
- Not all equity is equal
- preferred shares with liquidation preferences take their money before ordinary shares
- Parties
- the shareholders receive it; the buyer pays it
How equity value works in practice
Enterprise value is what the business is worth; equity value is what the owners get. The gap is the balance sheet: the buyer takes over the company's cash and its debt, and the shareholders are paid the enterprise value adjusted for both. A company with €5m of cash and no debt is worth €5m more to its shareholders than its enterprise value; one with €5m of debt, €5m less. The bridge between the two numbers is settled at completion by a locked box or completion accounts, and the working capital adjustment moves it further.
In venture funding rounds "valuation" means equity value — the pre-money valuation is what the existing shares are worth before the new money, and the post-money valuation is pre-money plus the money raised. A €6m round at €24m pre-money buys 20% of the company. But because venture rounds create preferred shares with liquidation preferences, the equity value at exit is not shared in proportion to ownership: the preferred shares take their preference first, and the ordinary shares — the founders and the option pool — divide what is left. A company sold for less than the total preferences pays its founders nothing, whatever percentage they held.
For a fintech with client money on its balance sheet the same rule applies as for enterprise value: safeguarded funds are not the company's cash and do not raise its equity value.
Example
A payments company is sold at an enterprise value of €40m. At completion it has €3m of cash, a €1m loan and €0.5m of accrued bonuses treated as debt-like; working capital is €200,000 above the peg. Equity value is €40m + €3m − €1m − €0.5m + €0.2m = €41.7m. Of that, €12m of preferred shares carry a 1× non-participating preference: the preferred holders take €12m (or convert, if their 30% stake would be worth more — here €12.5m, so they convert), and the €41.7m is shared pro rata after all. Had the company sold for €20m, the preferred holders would have taken €12m and the founders shared €8m.
Common mistakes
- Confusing pre-money and post-money valuation in a term sheet, a mistake worth the whole round. - Founders modelling their exit on their percentage without the preference stack. - Treating equity value as a fixed number before the bridge is agreed. - Comparing a funding-round valuation (equity) with an acquisition multiple (enterprise). - Counting client funds or safeguarded balances as cash that raises the price.