Value of RSUs for a pre-IPO biotech company

In the journey of becoming a healthcare entrepreneur some may have an offer to partake in an upstart new venture (a venture that isn't your own). Besides the experience you'll receive, you're likely to be offered equity in the fledgling company - RSUs or restricted share/stock units. How you value those RSUs will determine if the entire compensation package is competitive enough to, temporarily, forgo opening your own venture. Let's look at a case of valuing RSUs so you can make a more informed decision.

The case →

What questions can I ask about a company to best value the RSU compensation?

I received an offer for a medical director role at a pre-IPO biotech. The only incentive for the role is the value of the equity might be. Since the company isn’t public, I’m not sure how to value the RSU amount without a stock price. I know the approximate amount of money the company has raised so far and have a good sense of market cap if they’re successful, 

Pre-IPO companies ≠ pre-IPO biotech companies

In the movie Margin Call the CEO reminds us of the three ways to make money as an entrepreneur: be first, be smarty, or cheat. Getting in early (being first) is a great way to succeed in business, and that means being an equity investor in a pre-IPO firm. The price you pay to be first (i.e., the value of the equity you agree to purchase) will depend on how you value the company. In general, pre-IPO non-biotech companies generate enough positive cash flow for you to value the business (see "The value of your venture: a Shark Tank deconstruction" for details).  

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:

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.