Remedial Choice In Informal Venture Partner Equity Disputes
Aggrieved venture contributors elect either specific performance for corporate equity or restitution of fair market service value when informal pacts fracture.
illiquidity discount
Meaning
Valuations of private equity interest sit within the framework of a market adjustment known as the illiquidity discount. This reduction in the estimated value of an asset occurs because it cannot be quickly converted into cash without a loss of value. The measurement governs the appraisal of founder holdings during a buyout or a tax event and stops being relevant once a public market for the shares exists.
Market Adjustment
Calculation of the reduction depends on the time expected to find a buyer and the restrictions on the transfer of the shares. When the illiquidity discount is high, it reflects a lack of interest from outside investors or a complex set of bylaws that make selling difficult. This adjustment lowers the taxable value of the estate.
Liquidity Assessment
Evaluation of the cash flow and the financial health of the business helps to determine the appropriate size of the discount. A company with steady profits and a clear exit path will face a smaller reduction than a failing startup. This assessment is performed by a professional appraiser using market data.
Valuation Impact
Negotiating the final price of a founder’s stake requires an agreement on how much the lack of marketability should cost. A disagreement here can lead to a gap of thirty percent or more in the final payout. The impact of the discount is felt most at the moment of exit.