Complex Securities Valuation

Equity Warrant Valuation

Under ASC 820: Fair Value Measurements and Disclosures, all of a equity warrant’s features must be reflected in the valuation process your company uses. This will quickly rule out simplified techniques (e.g., the Black-Scholes formula) for warrant instruments containing make-whole provisions, contingent exercise provisions, or other complex features, and may even do so for plain-vanilla warrants. As a result, a warrant valuation can be challenging to determine and validate.

Improperly formed values can adversely affect stockholder equity and borrowing costs. Because warrants are often used by companies as a “sweetener” to provide extra incentive for a deal, this can also lead to over- or under-sweetening of various types of financing transactions. What’s more, audit fees or regulatory fines due to fair value errors or incomplete documentation can easily turn out to be higher than the cost to get the valuation right the first time around.

Equity Warrant Valuation Services

Equity Methods provides organizations with an equity warrant valuation via the following process:

  • Review the appropriate GAAP accounting for the warrant instrument
  • Identify all of the warrant’s unique features that will require custom modeling and handling. Important features that need to be carefully identified and modeled include the following (among others):
    • Warrant adjustments due to down round protection, dilution, or firm performance conditions
    • Caps on the value of warrants
    • Limitations on exercise over certain periods
    • Contingencies which link the warrant to other financial instruments, such as a warrant which cannot be exercised until a certain debt instrument is repaid
  • Test variables and assumptions within the valuation model
  • Provide comprehensive documentation to help issuers streamline the external audit process
  • Update the valuation model each quarter in a cost-effective way for warrants that require fair value to be marked-to-market

Eliminate costly audit time with our custom valuation modeling performed with informed assumptions.

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Additional Resources

mimoWebcast

Creative Financing Using Convertible Securities And Warrants

Convertible securities are tools which combine features of debt and equity financing. But they’re tricky to value and can lead to complicated accounting treatment. In this on-demand webinar, we explain ways to manage the risks and benefits of these complex securities.

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articleBlog Post

What Is a Stock Warrant?

Stock warrants are an attractive vehicle for sales incentives, corporate control transactions, and lending transactions. But watch out: Determining fair value can be tricky.

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two_pagerWhite Paper

Anti-Dilution Provisions in a Warrant Offering

Warrants are outside financing instruments that can be used on a standalone basis or as sweeteners in a broader financing transaction. Often, warrants contain what are called down-round or ratchet provisions, which are designed to protect early-stage investors from future dilution. These features require special modeling outside of Black-Scholes and give rise to other accounting implications. Learn more in our newly published white paper.

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articleBlog Post

The End of Liability Accounting for Down Rounds

Does your company have outstanding financial instruments with down round protection features? FASB may have saved you a lot of work.

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articleBlog Post

Warrants on Preferred Stock: Is Black-Scholes Leading Us Astray?

We explain why the Black-Scholes model can drive potentially problematic results on private company preferred stock, then discuss ways to work around this.

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Meet Our Experts

Josh Schaeffer, PhD

Managing Director, Valuation & HR Advisory Services

Nathan O’Connor

Managing Director

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