The Valuation of Venture Capital Convertible Preferred Stock When Equity Claims Are Nested

This article develops a model that private equity investors can use to value the various components of the equity capitalization of an emerging growth firm whose capitalization contains several equity claims. The model relies on the contingent claims approach pioneered by Black, Scholes, and Merton (BSM). The model provides a separate value for each class of equity claims, respects the payment priorities of the various claims, and fully apportions the firm's aggregate equity value. I illustrate the model's utility by presenting an actual example. The model can be used by venture capitalists to value their investments, especially late-stage investments in firms with complex capital structures that contain multiple classes of convertible preferred stock from earlier venture rounds.