Value of RSUs for a pre-IPO biotech company

Unfortunately, pre-IPO biotech companies have negative cash flows. Until they receive FDA approval for their drug/device, they'll rely on debt and equity financing, rather than operating revenue, for cash. The absence of positive free cash flow from operations makes it difficult to value the company and thus, the shares for which you are considering a purchase. 

What are some ways to value a pre-IPO biotech company? Whether you're an investor or a potential employee, knowing the value of the equity helps you determine if investing/employment is the right fit for you.

Option 1: Calculate valuation using an estimate of market capitalization

Market capitalization is the total equity employed by the firm. This value is pretty easy to obtain when the firm is publicly traded. For pre-IPO biotech companies, you'd need access to their financial statements, especially the balance sheet, to know how much equity ($) is in the company. For pre-IPO biotech companies that have undergone a financing round(s), the equity value should be publicly available though not as easy to find. 

However, knowing the total outstanding shares will be harder to find. If you can obtain this information, you'll have a *snapshot* of the equity value of the company. Keep in mind that *snapshots* can be misleading - having a trend of valuation is often more informative.

Option 2: Calculate valuation trend from previous financing rounds

Most pre-IPO biotechs require financing to keep operating. There are two main ways of financing your operations: debt or equity (see "Debt v Equity Financing: a Shark Tank deconstruction" for details). Equity financing requires certain disclosures so that potential investors can determine if they want to participate in the company's growth. These disclosures:

• are integral to each financing round, 

• reveal information about equity earned versus shares distributed, and 

• are publicly available. 

The information obtained from each financing round will tell you how much value investors see in the company. You can trend that valuation over a period of time (time between financing rounds).  Use that trend to determine how much value the company should have at the time you are considering becoming an equity holder.

Pre-IPO biotechs are non-revenue-generating companies. The lack of positive cash flow makes it difficult to accurately value a company. Using any of the above techniques can give you better clarity into the equity investing opportunity before you. Ultimately, as you inch closer to starting your own healthcare venture, you can use these techniques to monitor its valuation.