Valuing Common and Preferred Shares in Venture Capital Financings
28 Pages Posted: 12 Jun 2010 Last revised: 5 Sep 2010
Date Written: September 1, 2010
Venture capital financing contracts often use preferred shares which carry preference rights compared to common shares. This paper studies and compares five different methodologies to value common and preferred shares with liquidation rights in a single-period setup of venture capital financing: the so-called venture capital method, discounted cash-flow valuation methods using both the Capital Asset Pricing Model and a Market Model in logs, a risk-preference based approach and finally the real options approach.
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