In the venture business, we tend to think about valuation in terms of pre-money and post-money. We calculate valuation multiples off of this valuation and do not get too caught up in the nuances of equity value vs enterprise value, fully diluted shares, cash and debt adjustments, etc. This is partly because Internet start-ups tend to be fairly straightforward operationally. You tend to have some sort of revenue build-up, a simple cost structure, clear cut operational costs, and bottom-line profit. It is unusual to see debt, and since most start-ups are spending for growth, you rarely see any significant cash accumulation.
As a company matures and gears up to be a public entity, this all changes. The variables mentioned above can significantly alter how you think about company value and should be adjusted for accordingly. Below is a step-by-step guide using Fitbit's S-1 as an example that shows you where to find the right share counts and illustrates how to properly calculate valuation at IPO (prior post on Fitbit here).
Below is a screenshot of "The Offering" section of Fitbit's S-1:
Step 1 - Find the total shares of common stock to be outstanding after the offering. Per "The Offering" section in S-1, you can see that about 204M shares will be outstanding post-IPO.
Step 2 - Find the options outstanding. There are multiple ways to account for options but for the sake of simplicity, you can just grab it from the bottom of "The Offering" section in the S-1. Note the share counts and corresponding strike prices. For RSUs, the strike price is $0.
Step 3 - Calculate the fully diluted shares outstanding using the Treasury Stock Method (TSM). You can study the formula separately, but it basically states that if the strike price of the option tranche is less than the offering price, then exercise the options and use the proceeds that are generated to buy back shares at the offering price. For example, let's take the 47.4M options exercisable at a weighted average exercise price of $2.19. If Fitbit went public at $15/sh, then these options could be exercised. The formula is ((($15-$2.19)*47.4)/$15) = 40.5M shares. So, rather than including all 47.4M shares into the fully diluted share count which would overstate valuation, you only need to add 40.5M. Do this for all tranches of options, restricted stock units (RSUs) and warrants.
Step 4 - Determine fully diluted share count by adding basic shares outstanding post-offering to the additional TSM options.
Step 5 - Calculate equity value by multiplying the offering price by the fully diluted shares.
Step 6 - Calculate enterprise value by adjusting for cash and debt. Take the primary shares offered and multiply by the offering price to find out how much public funding the company is raising (less any IPO fees which vary but you can estimate at 7% of proceeds from the offering). Also, tally up the net cash already existing on the company's balance sheet (cash - debt). Enterprise value = equity value - IPO proceeds - net cash.
Step 7 - You now have the proper enterprise value and can calculate revenue multiples or EBITDA multiples from there.
I created a quick sample IPO matrix to illustrate:
Note that had you not calculated fully diluted shares this way, you would be significantly underestimating valuation. Using just the basic share count at $15/sh, Fitbit's IPO enterprise value would be $2.7B rather than the $3.3B that we calculated, way off!