Dear SaaStr: If you have old founders who left the company and kept their shares, on what valuation you buy their shares?

Generally speaking, there are two paradigms:

  • Buy them out at Common Stock price (which is what they in fact own), based on the lastest option pricing / 409a valuation; or
  • Buty them out at the Preferred Stock price (what VCs have bought the stock at, or are now buying it at), or some discount thereto (often 10%-25%)

Depending on timing, the difference, or “spread”, can be material.  Or in some cases, if the common stock value has grown but the company hasn’t raised a venture round in some time … the spread may be minor.

Using the Common Stock Valuation paradigm is “easy”.  You take the lastest 409a valuation (or go get one), and use that.  Or at least, as a basis for discussion.

If instead you are going to use the often higher price any VCs or others invested in at the Latest Preferred Stock Valuation … then the question comes in, what should the “discount” be because it’s not in fact Preferred Stock?

That will depend in part on how the purchase is being done.  If the company is directly buying and retiring the shares, some technical issues aside (talk to your lawyers) … it’s whatever the parties agree.

If existing VCs are buying common stock from the founders (not uncommon) … they’ll often want at least a material discount for buying common stock instead of preferred.

The easiest way to do this in the end is if there is surplus demand in the next VC round. 

If there is, you can just ask the VCs if they want to buy more in the form of common stock.  And they can figure out the price and discount.  If they’re greedy and want to own more, they’ll figure it out.

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