Say you are an employee of a company like Publix , a privately owned company. You are given shares of company stock as a bonus. How do they determine that the stock is going up or down? Who determines the price of the stock? You can sell it only to the company, right?
If the company is privately owned, then the stock has no market, it cannot be traded on the open market. Some companies will buy and sell their stock, but that is very rare. In these cases, the value of the stock is mostly a foo-foo number. It is supposed to represent the total investment in the company divided by the number of shares. But with many companies, as new investment comes in, the old investment is written down by doing splits and reverse splits. Sometimes companies simply assign a par value to the stock, and if a new offering is approved, they assign an arbitrary par value to the new offering.
What the stock does do is establish ownership. If you have a class of stock that has voting rights, then you have some say-so in the company. You have a much bigger say-so if you are part of a block of stocks that can vote enough shares to have a majority.
Stock starts to have real value once a company goes public. Some privately owned companies will do a public offering. They do this to give the stock a real value, which is great for employee stock plans, but at the same time, they hold back over 50% of the stock, or they make the public stock to be a non-voting stock. That way, they retain control of the company despite it being public.
-john-
In this situation, the board of directors is responsible for providing a good faith valuation:
I respectfully speculate that this is not the case. I suspect that there are many more startups than "established" private companies, and startups often sell their stock in funding rounds to raise initial and subsequent capital.
It's supposed to represent the fair market value of the company; for most companies, that is significantly higher than the total capital investment. And for failing companies, that can be significantly lower :-(
This would mean that the company was indeed selling stock. In this case, the last offering price can serve as a starting point for the fair market valuation.
Par value and fair market value are different beasts.
"The par value of a share is its minimum stated value. Par value typically does not correlate to the actual value of a share. Common par values are $0.01, $1.00, or no par. ... For private companies, the actual value of a share is typically determined by the overall value of the C corp or the book value."
Hence a control premium, which is one reason why offering price is merely a starting point in determining fair market value.
Mark Freeland snipped-for-privacy@sbcglobal.net
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