Wayne, The question becomes much less complicated once they go public, because both public and private equity are valued at the public price. That is why so many cos. in the 90s came out with public offering of 10% or less of total equity, to set a value for the private players. So, you are basically dependent upon how the market views the prospects for ever turning a real profit vs. the decline of equity on the balance sheet.
If it does not go public and the same thing happens, then it really gets complicated. Part of it has to do with the nature of the assets. If the assets are a selling software program, it is valued one way. If it is forest holdings, it is valued differently. But if the assets are viewed as worthless by potential buyers, the equity folks are wiped out. What really cuts into equity is when the new money coming in makes them junior. This is what is happening with all the cos. issuing convertible debt on top of existing shareholders.
But the real problem is, an accountant can give you an exact number for what a firm is "worth," but that may mean nothing. It is either the market's perception or the studied view of private holders that sets the price and determines whether there will be new financing for the co.
Original equity holders getting wiped out prior to bankruptcy is very rare in the case of major venture capital funds, as they have binding contracts. But for individual shareholders who buy into a venture level co., it is almost the expected result.
I have bought many venture deals in the past. Nearly all wiped out. A handful were very profitable. It has happened over so many years and is such a small part of my total portfolio, I am not even sure if I am a winner or a loser on that style of investing. It gets mixed in with regular options on my 90/10 and that has been a long term winner, but I'm not certain if the venture part has been or not.
I hope this helps and somebody else may be able to address the legal and accounting issues. |
