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The Financial Reporting Blog

A weekly update on financial reporting topics curated by Mercer Capital’s Financial Reporting Valuation professionals

Unicorn Valuations: What’s Obvious Isn’t Real, and What’s Real Isn’t Obvious

In the two short years since Aileen Lee introduced the term “unicorn” into the VC parlance, the number of such companies has steadily increased from the 39 identified by Lee’s team at Cowboy Ventures to nearly 150 (and growing weekly) by most current estimates. Pundits and analysts have offered a variety of explanations for the phenomenon, with some identifying unicorns as the sign that the tech bubble of the late 1990s has returned under a different guise, others attributing the existence of such companies to structural changes in how innovation is funded in the economy, and the most intrepid of the group suggesting that the previously undreamt valuations are fully supported by the underlying fundamentals given the maturity and ubiquity of the internet, smart phones, tablets, and related technologies.

Look Before You Leap: Evaluating a Section 83(b) Election

It is easy to see how employees receiving restricted shares and making a Section 83(b) election can benefit if the price of the stock rises between the grant and vesting dates. An 83(b) election may appear especially appealing to (early stage) startup employees who tend to be (preter) naturally optimistic about the prospects of their employer companies. However, the benefits of a Section 83(b) election – especially after consideration of the risks involved – may be less significant than originally anticipated. Three conditions (often outside the control of the employees) must be met for an 83(b) election to provide a (risk-adjusted) advantage: (1) Securities awarded as compensation have relatively low values at the time of grant; (2) the exit event for the employer company, or other transactions that may provide liquidity to the employees, occurs at relatively high implied valuations; (3) employees remain employed at the granting company until the awards vest. This blog post will primarily address the first condition.

Equity-Based Compensation: Are Non-GAAP Earnings Misleading?

During the 1990s debate over the status of stock options as a corporate expense, the big technology companies argued passionately that, since stock option grants to employees don’t ding the corporate checkbook, they should not be recognized as an expense. Despite winning the initial battle (SFAS 123), the tech companies ultimately lost the war (SFAS 123R). Regardless of the ongoing debate about how best to measure earnings, stock-based compensation is a tool used by companies of all sizes and in all industries. In order to deliver the most reliable information to investors, companies need to carefully evaluate the value of such compensation packages when granted.

An Overview of Personal Goodwill

In the world of FASB, goodwill is not delineated into personal goodwill and corporate or enterprise goodwill. However, in the tax world, this distinction can be of critical importance and can create significant savings to a taxpayer involved in the sale of a C corporation business.

Yes, Virginia, the Cost of Capital Really Is Low

Because of the wide availability of low-cost debt, even a “hefty” purchase multiple does not necessarily obliterate prospective equity returns. Berkshire Hathaway’s purchase of Precision Castparts provides a timely illustration of the practical effect of the Fed’s accommodative monetary policy on corporate costs of capital and valuation multiples.

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Travis W. Harms, CFA, CPA/ABV

(901) 322-9760

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Matthew R. Crow, CFA, ASA

(901) 685-2120

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Lucas Parris, CFA, ASA-BV/IA

(901) 322-9784

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Sujan Rajbhandary, CFA, ABV

(901) 322-9749

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