What accounting-related difficulties can companies encounter because of such funding transactions?
Saba: I see many companies going through successive rounds of both debt and equity financing. From a valuation perspective, there are a few issues inherent to that process that can affect a company’s financials. First, rounds of financing lead to a complicated capital structure for the company in which several different layers may exist. For example, a company may have common stock and several layers of preferred stock with different rights and liquidation preferences, as well as options, warrants, and occasionally convertible debt. When companies are regularly issuing options, they have to comply with FAS 123R. This standard requires companies to set a price on stock options as they are issued and, subsequently, to expense them. When my firm is asked to value a company’s common stock, the process requires valuation of the equity of the company as well as allocation of that equity value through the company’s complicated capital structure. This process can be challenging because much of
