A preferred round price values the preferred share, with its liquidation preference, not the company. Backsolving it through a scenario waterfall gives both the equity value and the common.
Because the round price values the preferred share, liquidation preference included, not the company. Backsolve it: find the equity value at which the new preferred is worth exactly what was paid, then run that value through the waterfall. In an illustrative company whose Series B at 2.50 implies a post-money of 50.0 million, the backsolved equity value is 39.0 million and the common is worth 1.81 a share, 72.5 per cent of the round price.
Worked in full in The Private Markets Valuation Specialist by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The post-money is a headline: price per preferred share multiplied by every share outstanding, as if a founder's common share carried the same protection as an investor's preferred. It does not. When a valuation specialist marks a venture or growth holding, or prices common for an option grant or a secondary sale, the question is what each class receives across the outcomes the company might reach. The round price is evidence, and calibration means using it as evidence about the preferred.
| Class | Shares | Issue price | Preference |
|---|---|---|---|
| Common (founders and employees) | 11.0 | ||
| Series A preferred | 5.0 | 1.00 | 5.0 |
| Series B preferred, senior | 4.0 | 2.50 | 10.0 |
| Total, and post-money at 2.50 | 20.0 | 50.0 |
Three exit scenarios, already expressed in present-value terms so discounting does not cloud the allocation: a downside at 6.0 million of equity with a 25 per cent probability, a base case at 40.0 million with 50 per cent, and an upside with 25 per cent whose value the backsolve will find.
Each non-participating class takes the greater of its preference and its as-converted share of what is left.
Series B: =MAX(MIN(Equity,10.0), Equity*4.0/SharesIfConverted), tested together with Series A, because one class converting changes the other's as-converted share. Keep the combination in which neither class would rather switch.
| Scenario | Equity | Probability | Series B | Series A | Common | Per common share |
|---|---|---|---|---|---|---|
| Downside | 6.0 | 25% | 6.000 | 0.000 | 0.000 | 0.000 |
| Base | 40.0 | 50% | 10.000 | 9.375 | 20.625 | 1.875 |
| Upside | 70.0 | 25% | 14.000 | 17.500 | 38.500 | 3.500 |
| Probability-weighted | 39.0 | 100% | 10.000 | 9.0625 | 19.9375 | 1.8125 |
In the downside the Series B takes everything and is still short of its 10.0 million. In the base case it takes its preference, because converting would give it only 8.0, and the Series A converts, sharing the remaining 30.0 with the common pro rata to receive 9.375 against a 5.0 preference. In the upside both classes convert and every share is paid alike.
The Series B investor paid 10.0 million for its shares in an arm's length round. Calibration requires the model to value that block at 10.0 on the transaction date. Its probability-weighted payoff is 0.25 × 6.0 + 0.50 × 10.0 + 0.25 × upside share. Solving for the upside scenario that makes the total exactly 10.0 gives an upside equity value of 70.0 million, where the Series B's as-converted 20 per cent is 14.0. In Excel this is a Goal Seek on the upside cell, setting the Series B's weighted value to 10.0.
With the scenarios calibrated, the probability-weighted equity value is 39.0 million, 11.0 million or 22.0 per cent below the 50.0 post-money. The common is worth 19.9375 million, or 1.81 a share against the 2.50 round price: 72.5 per cent. Valuing the common at the post-money price would put 27.5 million on it, an overstatement of 37.9 per cent. The Series A, which converts whenever there is anything left for it, ends at the same 1.81 a share as the common in this case.
The gap is not a discount for lack of marketability. It is the value of the preference, measured. Any marketability discount on the common is a separate step, taken afterwards and evidenced on its own terms (see how far a marketability discount can be evidenced), and a conventional percentage applied to the post-money price is no substitute for running the waterfall.
| Downside probability | Upside value solved | Equity value | Common per share | Of round price |
|---|---|---|---|---|
| 10% | 55.0 | 42.6 | 2.04 | 81.5% |
| 25% | 70.0 | 39.0 | 1.81 | 72.5% |
| 40% | 130.0 | 35.4 | 1.59 | 63.5% |
The more probability sits where only the preferred gets paid, the larger the upside must be to justify the price the investor paid, and the less the company and its common are worth. The preference terms are identical across the three rows. What moves the common from 81.5 to 63.5 per cent of the round price is the judgment about the downside, which is why that judgment belongs in the valuation memo, written down and defended, not buried in a cell.
The round price prices the preferred. Backsolve the equity value that makes it fair, here 39.0 million against a 50.0 post-money, and read every other class off the same waterfall: 1.81 a share for the common, 72.5 per cent of the headline. The free workbooks for this book run the bridge and the waterfall through participating and non-participating preferred, common and an option pool, and the bridge from enterprise value to equity value covers the step that comes before this one.
Usually not. Post-money multiplies the preferred price by every share, as if each had the preferred's rights. In the illustrative case the Series B at 2.50 gives a post-money of 50.0, but the equity value at which a 2.50 Series B share is fairly priced, once its 1x preference is modelled across scenarios, is 39.0: 22.0 per cent lower.
It depends on how much of the outcome range sits below the preference stack. In the illustrative case common is worth 1.81 against a 2.50 round price, 72.5 per cent. With a 10 per cent chance of the downside scenario instead of 25 it is 2.04, 81.5 per cent; at 40 per cent it falls to 1.59, 63.5 per cent. The preferences do not change; the probability weight beneath them does.
A backsolve finds the company equity value that makes the security just issued worth exactly its issue price under the chosen allocation model, then uses that equity value to price every other class. It treats the round as the one observable transaction. Here the Series B price of 2.50 implies 39.0 of equity and 1.81 per common share.
This article is one calculation from The Private Markets Valuation Specialist. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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