I'm not sure Freedman is trying to make a theoretical argument that you can't extrapolate marginal price per share into total market cap. What struck me here, but what the author fails to point out directly, is that the implied value from preferred stock does not equal the implied value from common stock.
In the snapchat instance, he's highlighting a preferred stock deal that has 1. liquidation preference and 2. interest. So they effectively have a deal with components of both long and short options (i.e. they get a gain with exits above $3bn, but no loss unless the exit is below $100m), and a bond (~8% interest on the $100m as long as they don't default).
So you can't take what is effectively a $3bn strike price and say that's the implied value of the preferred stock deal, because it's not. To get the true implied price, you'd have to dissect the valuation of each option, bond, and stock component of the deal. There are standard methods to value each component, but don't expect the start up media to do the calculation for you.
Thanks, that makes a lot more sense, and you're right that is the point that was being made.
It would be nice to see the scenarios expanded and stressing the outcomes for different classes of shares.
For example, on a second read I understand it that in scenario B the investor paid $100M for 3.33% of the "$3B" company, and gets a $108M payout even if the company sells for $1B (which would be equivalent to 10.8% of how much the buyer bought it for). If it sells for $30B, then he gets $1B.
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I'm not sure Freedman is trying to make a theoretical argument that you can't extrapolate marginal price per share into total market cap. What struck me here, but what the author fails to point out directly, is that the implied value from preferred stock does not equal the implied value from common stock.
In the snapchat instance, he's highlighting a preferred stock deal that has 1. liquidation preference and 2. interest. So they effectively have a deal with components of both long and short options (i.e. they get a gain with exits above $3bn, but no loss unless the exit is below $100m), and a bond (~8% interest on the $100m as long as they don't default).
So you can't take what is effectively a $3bn strike price and say that's the implied value of the preferred stock deal, because it's not. To get the true implied price, you'd have to dissect the valuation of each option, bond, and stock component of the deal. There are standard methods to value each component, but don't expect the start up media to do the calculation for you.
Thanks, that makes a lot more sense, and you're right that is the point that was being made.
It would be nice to see the scenarios expanded and stressing the outcomes for different classes of shares.
For example, on a second read I understand it that in scenario B the investor paid $100M for 3.33% of the "$3B" company, and gets a $108M payout even if the company sells for $1B (which would be equivalent to 10.8% of how much the buyer bought it for). If it sells for $30B, then he gets $1B.