Evaluations vs share price

This is regarding crowdfunding, is there any relation between the pre-money valuation and the share price?

This may be a stupid question but I’m looking at a startup on a crowdfunding website and they seem to have the higher share price among all other opportunities yet they have the smallest valuation.

Let’s say they have pre-money valuation of 1.8 Million, equity 15%, share price of £11, their target was £200.000 but they went over by around 150% of that target already.

My questions are, how come the share price is £11? In the same platform I can see other startups with much bigger valuations but smaller share prices.

I just assumed that in early crowdfunding rounds the share prices for these startups would be low (under £2 even).

Can someone explain how are the share prices calculated for startups or whether the founders can just put an arbitrary share price?

Also will the share price be likely to increase in future fund raisings?

Many thanks in advance.

The share price is deceptive and completely arbitrary. As a founder, you can price it high or low, whatever you like.

The most important metric to look for is the valuation/market cap (value of the company) and then compare the share price to that.

If two companies have the same market cap but Company A’s share price is 10p and Company B’s share price is £10, and you spend £100 on shares, you ultimately own the same % of each company.

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I didn’t get the 10p vs £10 and spending £100 on shares and owning the same % percentage of each company. Surely if I spend £100 on 10p shares I will ended up with more shares as opposed to £100 on £10 shares???

You’ll have more shares, but the value will be £100 regardless.

Share price on its own means absolutely nothing.

If you cut a cake into 4 pieces and take 1 slice you have 25% of the cake.

If you cut it into 100 pieces and take 25 slices you still have 25% of the cake.

There are pros and cons for having a higher and lower share price but the price on each stock isn’t indicative of the health of a company (broadly)

Take Amazon and Microsoft

Amazon are valued at 1.68tr with a share price of $3316

Microsoft are valued at 2.25tr with a share price of $299.09

There are just more shares in Microsoft than have been created in Amazon.

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Share price is the market cap divide by the number of shares.

If a company is worth £1,000,000 and they have 100,000 shares outstanding the share price will be £10

if they only have £10,000 shares outstanding the price will be £100

The share price depends entirely on how many shares the company decides to issue, and is meaningless as a way to compare two companies.

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Thanks for the explanation.

Let’s say Microsoft was to do a round of funding… would the share price in this round likely to be higher than the $299.09? Assuming the company valuation has actually grown. I would assume the share price would be equal or higher so that the initial investors aren’t worse off ?

Microsoft aren’t likely to do it, but if a public company does raise money by issuing new shares they share price shouldn’t change (in theory) If they price the shares higher than the market price no one would buy them

in my example above say the £1,000,000 company raises £500,000 by selling 50,000 new shares at £10

The company is now worth £1,500,000. The share price is the same but there are now 150,000 shares in circulation.

It’s different with a non public company such as those on Crowdcube, as here is no price discovery by supply and demand, so they would decide on a valuation and share price, which would hopefully be higher than the last raise (but that doesn’t always happen)

They need to account for growth of the company and make as much as they can for the amount of equity they are offering, but price it at a price that’s attractive to investors, which is a bit of a balancing act.

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Microsoft is probably a bad example since they are publicly traded.

Freetrade (the company itself) is a better example, since they are still private. If the company needs to raise more capital, they will usually do so at a higher valuation… as long as there is growth, or their other types of goals are being reached. This means the share price will likely increase.

On the other hand, it is not unusual for startups to raise further capital at a reduced valuation. Take airbnb and Monzo for example: both were struggling and needed capital, so their new investors got a bargain at the expense of the old ones.

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Yes, I’m interested o private companies, I think i understand the public companies but I was getting confused with the share price in private companies doing fundraises.

As per the example of airbnb and monzo, early investors may be burned in later rounds of investments if the company isn’t performing.

I’m starting to think that in the case of the company I was looking at… at the current share price, early investors may be burned then once they need to do further raises…

When a company raises money by issuing new shares early investors will see their equity decrease a bit.

This is called dilution and isn’t necessarily a bad thing as long as the share price is still increasing.