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Posted by Mark Freeland on January 29, 2008, 2:22 pm
>
>> Say you are an employee of a company like Publix , a privately owned
>> company. You are given shares of company stock as a bonus. How do they
>> determine that the stock is going up or down? Who determines the price of
>> the stock? You can sell it only to the company, right?
In this situation, the board of directors is responsible for providing a
good faith valuation:
http://beysterinstitute.ucsd.edu/about_employee_ownership/critical_issues/valuation.html
> If the company is privately owned, then the stock has no market,
> it cannot be traded on the open market. Some companies will buy
> and sell their stock, but that is very rare.
I respectfully speculate that this is not the case. I suspect that there
are many more startups than "established" private companies, and startups
often sell their stock in funding rounds to raise initial and subsequent
capital.
> In these cases, the
> value of the stock is mostly a foo-foo number. It is supposed
> to represent the total investment in the company divided by the
> number of shares.
It's supposed to represent the fair market value of the company; for most
companies, that is significantly higher than the total capital investment.
And for failing companies, that can be significantly lower :-(
> But with many companies, as new investment
> comes in, the old investment is written down by doing splits
> and reverse splits.
This would mean that the company was indeed selling stock. In this case,
the last offering price can serve as a starting point for the fair market
valuation.
> Sometimes companies simply assign a par
> value to the stock, and if a new offering is approved, they
> assign an arbitrary par value to the new offering.
Par value and fair market value are different beasts.
"The par value of a share is its minimum stated value. Par value typically
does not correlate to the actual value of a share. Common par values are
$0.01, $1.00, or no par. ... For private companies, the actual value of a
share is typically determined by the overall value of the C corp or the book
value."
http://www.fastonlinecorp.com/faqs.shtml#CQ8
> What the stock does do is establish ownership. If you have a
> class of stock that has voting rights, then you have some
> say-so in the company. You have a much bigger say-so if you
> are part of a block of stocks that can vote enough shares to
> have a majority.
Hence a control premium, which is one reason why offering price is merely a
starting point in determining fair market value.
Mark Freeland
BnetOnewsX@sbcglobal.net
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