Convertible instruments are required when a company possesses complex instruments such as OCPS, CCPS, etc. The first step in valuing a company with a complicated capital structure is to determine its value using a combination of the income, Market and Asset approach based on its nature and the stage, model, and its purpose of valuation. The next step is to allocate the company value amongst various security classes such as Equity Shares, OCPS, CCPS, etc.
Black-Scholes OPM Method
Black–Scholes is a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables such as volatility, type of option, underlying stock price, time, strike price, and risk-free rate.
In the Black–Scholes OPM method, each of the share class will only have value if the funds available for distribution to shareholders surpass the value of the liquidation preferences, at the time of liquidity event for each of the prior share classes in a company’s cap table.
This model involves creating breakpoints. Further, each class of security is valued as a call option using Black-Scholes OPM. Later, the incremental call option value is then allocated among every breakpoint, based on the relative liquidation value, and consequently based on the outstanding number of shares.
At Valuation India, we offer valuations under convertible instruments to a wide range of businesses. We employ a team of experienced and authorized people who help our clients perform valuation under convertible instruments.