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"Owner A owns 100% of a privately held company and wants to sell 5% of the company's total shares for a sum of $10,000. Buyer A is willing to purchase 5% of Owner A's shares for $10,000. What this means is: Paper valuation of the entire company becomes $10,000 / 5% = $200,000. Owner A receives $10,000 cash and becomes $190,000 richer on paper ($200,000 X 95% of shares). Buyer A now owns 5% of a company he wanted to own a part of." |
Paper Valuation is the value of privately held shares that is not directly tradeable at an exchange. This notional value, though, is as yet untested on real buyers.
The opposite of paper value is exchangeable value, and is the value that is directly monetizable as long as there is a willing buyer and a willing seller.
Thus, if the aside exchange was made as an "Exchange Valuation" this new company valuation would be tradeable directly on the stock exchange. One problem with Paper Valuation is that it is not that easy to monetize in a short time period.
This valuation concept is a cornerstone in the stock exchange world. Value exchange is paramount to its existence.