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Lets assume the example of Groupon which is going to be public this year or next year.Suppose if someone invests $100Million in the company,will its valuation increase for the individual or for its shareholders after it goes public.

The second question arises from the above fact is of underwriters.Is the work of underwriters and private investor who has invested has same valuation?

To make this more clear let me take example of Facebook Inc. and Goldman Sachs deal.The deal was valuated at $50Billion with an investment of $450Million from Goldman Sachs.This relates to my question that if some private investor had invested $450Million would it be valuated at $50Billion?

Doing this will he/she will have some issues like INSIDER TRADING etc?What can he/she do to avoid this,I mean what is the solution of this issue?

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3 Answers

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Just a note - if you invest into the company while it's still private, you won't be able to get your money back unless it's being bought by other company or goes public.

With many start-ups this can take 4-5 years and can never happen. Start-ups will try to re-invest any profits so you won't get dividends either.

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Going back to basics, the value of your shares = value of company * % of shares that you own. This always holds.

  • If the value of the company goes up and your share % remains constant, your share value goes up.

  • If the value of the company remains the same, but your share % increases, your share value goes up.

  • If the company doubles and your shares % halves, then your value stays the same.

The difficulty is that before a company is public, the "value" of the company is a negotiated thing. So if you invest $1 million on a valuation of $9 million (pre investment), you will own 10% of the company (1 / (9 + 1)).

So here it is down to what the negotiated value is, and there is no formula for that. Negotiating skills; how desperate the company is for investment; what else you are bringing to the table, all play a role in determining the value.

The concept of insider-trading is based on someone trading shares in a public company for their gain while having relevant information that is not publicly available. So before a company goes public there is no such thing as insider trading.

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Thanks for your advice John,I would appreciate if you look at the answer from this url's perspective.Here s the Link.quora.com/… – MLTR Oct 3 '11 at 17:22
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Since there's no market in the company's shares, the valuation placed on it at the time of the investment is a matter for negotiation between the existing shareholders and the new investor. Whether this is a better deal for the new investor or for the existing shareholders depends on their negotiating skills.

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Thanks Mike.... – MLTR Oct 3 '11 at 17:21

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