Discounts - Present Value Theory Applied: 2025 Conference

Current practice of discounting non-controlling private company shares based upon public market characterizations misses the mark because the analysis is not based on cash flows to the investor / security, but on cash flows to the company. Present value analysis offered here employs a security's cash flow as the main value determinant.
 
Because all investor benefits and costs are in the future, a cash projection with a return of capital and appreciation is the necessary valuation model. With cash flow of the security, an appraiser can get a reliable result tied directly to a security's character. This rubric applies to common stock, membership interests, preferred stock, promissory notes, warrants and options.
 
To solve the appraisal problem, appraisers must select an exit date and event scenario, then project the cash to be received by the security, and apply an investor discount rate. When ownership entitlements are strictly applied at the company level as components of company equity value, the investor discount rate is seen to be driven by the risk-free rate and a company’s tendency to take additional cash from its investors, reinvest cash into the company, or distribute cash to its investors.