Chapter 7. Management Options, Control, and Liquidity

Once you have valued the equity in a firm, it may appear to be a relatively simple exercise to estimate the value per share. All it seems you need to do is divide the value of the equity by the number of shares outstanding. But, in the case of technology firms, even this simple exercise can become complicated by the presence of management and employee options. In this chapter, we begin by considering the magnitude of this option overhang on valuation and then consider ways of incorporating the effect into the value per share.

We also consider two other issues that may be of relevance, especially when valuing smaller technology firms or private businesses. The first issue is the concentration of shares in the hands of the owner/managers of these firms and the consequences for stockholder power and control. This effect is intensified when a firm has shares with different voting rights. The second issue is the effect of illiquidity. When investors in a firm's stock or equity cannot easily liquidate their positions, the lack of liquidity can affect value. This can become an issue, not only when you are valuing private firms, but also when valuing small publicly traded firms with relatively few shares traded.