acquisitions become a muchsmaller percentage of
the equity. In a publicly traded firm with widely
dispersedholdings,controlmaybefeasiblewithan
even smaller stake in the firm.- Thevalueofanequitystakewilldependonwhether
itprovidestheownerwithasayinthewayafirmis
run.Privatefirmsoftenapproachoutsideinvestorsto
raiseadditional equity to fundtheir expansionand
growth opportunities. Theseinvestors, whoinclude
private equity and venture capital investors, can
demand a share of control in return for their
investments. For instance, venture capitalists often
getrepresentationontheboardofdirectorsandsome
power over subsequent roundsof equityfinancing.
Manyplayanactiveroleinthemanagementofthe
firms in which theyinvest, and the value of their
equitystakeshouldreflectthispower.Ineffect,the
expected value of control is built into the equity
value. In contrast, passive private equity investors
whobuyandholdstakesinprivatefirmswithoutany
inputintothemanagementprocessshouldvaluetheir
equity stakes at a lower value.
Empirical Evidence
There is clear evidence that practitioners apply control
premiumsinprivatecompanytransactions,rangingfrom 15
to 20 percentforamajoritystake;conversely,thistranslates
intoanequivalentdiscountforaminoritystake.Theorigins
of these premiums are mysterious, and there have been
relativelyfewattemptstobackupthesevaluesbecauseitis
difficult to estimate the precise extent of the minority