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I'm trying to estimate the value of stock options for a startup company which might get acquired in the near future. The problem is that I don't know how to incorporate the shares into the formula.

Let's say that the company is acquired for $100M. If the company has 10M authorized shares and 5M outstanding shares what will be the value of an individual share? Do they have to buy 5M or 10M shares?

  • Since the remaining 5M shares would only give the purchaser 50% of the company, at minimum some of the existing shares must be purchased. I'd ask them (your company) if they will be issuing new shares, or if the acquiring company will buy the existing shares. – RonJohn Jun 25 at 13:29
  • The company haven't neccesarily issued the remaining $5M shares. They just have the right to do so. I'm not an expert in this regard that's why I'm asking here. I know that when you want to acquire a company you have to buy the shares but I don't know whether you have to buy the currently existing shares or all the shares which are authorized? – Adam Arold Jun 25 at 13:59
  • Your question is valid, but you're missing my point. "I don't know whether you have to buy the currently existing shares or all the shares which are authorized" We don't know what your company's board of directors has decided to do. That's why you need to ask the company. – RonJohn Jun 25 at 14:09
  • Oh, so they can decide whether they issue shares when / if an acquisition happens? – Adam Arold Jun 25 at 14:10
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    They can decide to issue the remaining 5M shares and have the acquiring company buy them. That means the acquiring company would have to buy some existing shares. We can't say what the company will do. – RonJohn Jun 25 at 15:06
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They (being the to-be-acquired company's board of directors) can decide to issue the remaining 5M shares and have the acquiring company buy them. That means the acquiring company would have to buy some existing shares.

That would almost certainly dilute the value of your shares. I say "almost certainly" because the acquirer might be buying your company for a premium and the premium is made up by the extra shares. Thus, the value of your shares would remain approximately constant.

But we can't say what the company will do.

  • This company is pre-IPO, so there are no stocks yet just shares. (They are not tradeable, not liquid). Does this make a difference? – Adam Arold Jun 25 at 16:22
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    A share of stock is part ownership in the no matter whether or not it's publicly traded. (All those privately owned companies have stock. The handful of owners just own all of it.) – RonJohn Jun 25 at 16:39
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Lets assume the authorized capital of the company is $100M. It can issue 10M shares of $10 each out of which it has issued 5M shares of $10 each. So its issued capital is 5M*$10=$50M. The company can issue another 5M shares but it has not. So currently the shares outstanding is 5M and investors' capital is $50M, which represents 100% of shareholders' holding. To acquire 51% stake in the company, any other company has to acquire 51% of 5M shares (considering the company does not issue any part of the remaining authorized capital and the value of the share has not gone up e.g. premium), the acquisition would cost 51% of $50M = $25.5M, not 51% of $100M.

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