Writing The Risk Section Of Your Private Placement

When writing your Private Placement, the risk section is one of critical parts. And given the mindset of seeking investors to invest in your transaction, there is some incongruity in that with the risk section you are telling your prospective investors all the reason they should not invest in your deal.

The reason the risk section is so important for your private placement is two-fold. First is to warn investors of the risk of inverting in the deal. The securities laws are in place to provide protection for the investor. Second, is to protect the issuer and you, the sponsor (the person putting the deal together), from potential claims that material risks were not disclosed.

There are a couple of things to keep in mind as you write the risk section of your private placement. First and foremost is to be totally transparent. Be factual and truthful in articulating the risks of your transaction. Look beyond your role as the one seeking investment capital and put yourself in the shoes of the investor; what would you want to know.

Second, present the risks of the transaction as they relate specifically to your deal. Avoid just stating general risks that would apply to any and all investments. For example, instead of just stating something like “…our business is affected by the economy”, your might instead state that “…our sales are dependent on discretionary income, which would be negatively affected by a slowing economy”. See the difference?

Third, just state the risk. Do not soften or try to mitigate the risk you are stating with commentary on why the risk may not happen. By doing so you are voiding the whole purpose of the risk section.

Finally I want to share a simple method on how to think through the risks in your transaction. Take your income statement and starting with revenue, think about all the things that could negatively affect each line item. For example looking at revenue would focus you on a major customer and the effect the loss of that customer would have on the business. Similarly, looking at the costs of good sold would focus you on the risk of having a single manufacturing facility and the effect that losing your facility would have on the business.

Your private placement is a document that is meant to help prospective investors make prudent decisions. Your role as an honest sponsor is to layout the facts and present your transaction, warts and all, as transparently as possible.

Capital Structure

Two weeks ago I started a series on an approach to evaluating private transactions. In the first part I set forth the idea that there are three pillars to effectively evaluating a transaction – capital structure, ownership and company. The evaluation of these three pillars helps frame two of the cornerstones of your transaction – the size of the commitment and the required return.

In this second part of the series we’ll look at the first of the three pillars – capital structure. Capital structure refers to how a business finances its operations and growth. At its simplest level capital structure consists of debt and equity.

The components of capital structure that I’ll discuss below are: Leverage; Loan-to-Value; Liquidity; Inter-Creditor Relationships; and Bankruptcy Considerations.

Leverage – Leverage in this context refers to debt to cash flow, with cash typically defined as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). If you are evaluating a business that has significant capital expenditures, (“Capx”), you will want to consider using free cash flow (“FCF”) in your leverage calculation. FCF is simply EBITDA less normalized Capx. If you find that the company’s depreciation is a good proxy for Capx, then you can use EBIT or EBITA.

A company’s Leverage is the back-of-the-envelope metric, or shorthand, used by corporate finance professionals to measure the debt load of a company. Additionally, it is a metric that speaks to the general mood of lenders; i.e. higher average leverage ratios mean that lenders are aggressively pursuing lending opportunities while lower average multiples reflect cautiousness on the part of lenders.

Leverage in a transaction will need to be assessed for both senior debt as well as any junior debt (also referred to as mezzanine or subordinated debt). The leverage multiple is expressed as a cumulative number, so that if senior debt is “3.0x cash flow” and there is half again as much debt from a junior facility, the total leverage would be expressed as 4.5x cash flow.

For example, if a company had $2.0 million of cash flow, $5.0 million of senior bank debt and $1.0 million of junior debt (which can either be “institutional” sub-debt or seller debt). The leverage ratios would be 2.5x senior and 3.0x total debt.

The “right” amount of leverage is more art than science. It needs to be weighed against credit statistics such as interest coverage and fixed charge coverage, the company’s business model, and the loan-to-value, or LTV.

Loan-to-Value – The leverage ratio cannot be thought about in a vacuum; it needs to be considered against the enterprise value of the business. When I was a lender I would regularly receive queries about what multiple I would lend. The only valid response would be “what’s the business” and “what’s the deal”. There were times someone would be looking for 3x senior financing on a business they were acquiring for 3x or 3.5x cash flow. So from a purely multiple standpoint, 3x cash flow sounded reasonable, but when considered in the context of LTV, the request clearly consisted of some measure of equity risk.

The LTV analysis is easier when considering an acquisition transaction – where there is a money vote on the valuation. And even here, I’d submit that you’ll want to validate the valuation by running your own return calculations and looking at comps (to the extent available). In the case of a refinance or recap, it’s a combination of judgment, experience, available comps and some math. All you’re looking for is some reasonable range on the enterprise value to put the transaction into proper context.

Liquidity – Liquidity refers to the short-term capital a business requires to finance its daily operations. A company’s liquidity is generated from 1) profitability; 2) working capital; and 3) lines of credit. Reviewing a company’s statement of cash flows is a great place to start when assessing cash flow and liquidity. If you’re not familiar with how to think about the statement of cash flows (and, you’re not alone), think of it as what ties the income statement and balance sheet together.

Working capital analysis involves looking at the business’s cash cycle and whether cash is being generated or consumed by the company’s working capital. One of the simplest fixes I’ve seen from buyout professionals has been fixing a company’s working capital. In more instances than I can recount, significant buyout debt had been repaid from cash generated from better working capital management.

Finally, with respect to any line of credit, make sure that it is sufficient to meet cash flow demands. Look at advance rates as well as excess availability.

Inter-creditor relationships – Inter-creditor relationships refers to the agreement(s) between different classes of debt holders. The most common would be the inter-creditor agreement between a senior lender and a subordinated lender. These agreements spell out the rights and remedies of each class of lender and typically only comes into play when there is a default or an event of default. The inter-creditor agreement will spell out what kind of blockage rights one class of lender will have over another. And while this topic may be of more interest to the providers of debt capital to a business, it is also important to understand for the business owner or transaction sponsor.

Bankruptcy Considerations – Bankruptcy considerations address the question of what happens in the event the company files for bankruptcy protection. From the perspective of a junior lender – which can either be a third party lender or a seller note – the junior lender will want to be secured. In the event of a bankruptcy, if the junior lender is unsecured, he will fall into the same class as all other unsecured claims. If however the junior lender is secured, he will have a priority claim over the unsecured debtors to any proceeds from a liquidation. The other implication here is that the topic above – Inter-creditor Relationship – comes into play. If the junior lender has a second lien on the company’s assets, the senior lender will want to make sure that they can control the security so that they protect their priority claims on the secured assets.

This covers the first pillar for effectively evaluating a transaction. While each of the areas discussed can be taken deeper, the purpose here is to give you a framework with which to think about a transaction. The next article in this series will address the second pillar of evaluating a transaction – Ownership.

Three Pillars For Evaluating A Transaction

I recently had the occasion to think about and articulate how to approach private debt transactions. When you’ve done something for a long time it becomes second nature. So when I sat down to deconstruct how I go about evaluating a transaction, it became an interesting exercise.

This will be the first of a series of articles that will present a simple and efficient way to think about how to approach a transaction. While written from the perspective of the investor/lender, this series will have application for any type of investor, as well as for those seeking to raise capital.

When you think about making a private debt investment, or really any type of private investment, it calls for the assessment of a number of aspects of the transaction. Having a systematic approach will help you touch on the critical aspects of the company.

The approach I will describe has three essential pillars. Sitting on top of the pillars is the investment decision (if you decide to proceed) of commitment size and required IRR. For most investors the size of the investment is tied to the required IRR. I’d submit that there is an inverse relationship between the size of the investment and the IRR; i.e. the higher the required IRR the lower the investment commitment. Of course there are those that like swinging for the fences. For those investors, there might be a closer, or positive, correlation to the required IRR and the size of the investment.

Each of the three pillars described below has several components to it. Listing and describing these pillars and their respective components is straight forward. It’s the analysis and evaluation of each pillar and its components where the rubber meets the road. It’s what you do with your evaluation that’s important.

The three pillars that this series will discuss are:

  1. Capital Structure;
  2. Ownership;
  3. Company.

Below is a simple list of the various components for each of these pillars. Subsequent articles in this series will expand the various components listed here.

Capital Structure When thinking about the Capital Structure of a company, consider its leverage (debt to cash flow), both senior and total leverage; loan-to-value; liquidity; intercreditor relationships; and bankruptcy considerations.

Ownership Aspects of a company’s ownership to consider include who owns the company; who controls the board; the management team and the breadth of the management team; track record; relationships; strength, reputation and integrity of the ownership/management; and access to additional capital.

Company This is where the majority of due diligence is spent on a transaction. the components of this pillar are quite broad. They include the company profile (franchise business value or diversified business value); strategic risks; execution risks; and industry dynamics.

Capital structure, ownership and company, the three essential pillars for evaluating a transaction. It’s interesting that while I never explicitly spelled out these aspects when working on a transaction, I invariably would touch on most of these topics when working through a transaction.

The next part in this series will look at Capital Structure and some of the aspects of each of the components identified above.

How To Price Your Warrants

One of the tricky aspects of structuring a private security offering is how to price your warrants, i.e. your equity give-up. The answer (in short): As much as it takes.

There is a price at which your transaction will clear the market.  A price that you pay in equity dilution and the price investors receive for the risk they are accepting.

When you go to market with a private placement, do the math upfront to make sure i) you’re providing your investors with an appropriate return, and ii) that you’re not giving away too much equity. To do that, there are six basic steps:

  1. Determine a base case forecast for the business.
  2. Determine the structure and terms (except for the actual warrant position) of the security you are issuing.
  3. Determine the expected enterprise value at the end of the investment horizon.
  4. Determine the equity value at the end of the investment horizon.
  5. Determine the dollar amount required that results in the targeted IRR.
  6. Divide the result you get in step 5 above by the result in step 4. That quotient results in the percent of equity you will need to make available for your investors.

Let’s walk through an example with real numbers so you can see how this all comes together. But first, some assumptions to frame the example:

  • You are acquiring a business for $5 million, or 4x the business’s EBITDA of $1.25MM;
  • You’ve arranged bank financing of $3MM;
  • You are able to invest $500 thousand of your own money;
  • The financing gap is $1.5MM; and,
  • Your investors will require a 30% IRR.

First you need to determine what your base case is for the business over the next five years. What will you be able to grow the EBITDA to over the next five years – the investment horizon? Lets assume for this illustration that you will be able to grow your business to $1.8MM in five years. Or approximately 7.6% compounded annual growth rate. We’ll also assume that at the end of five years that you’ll still have debt outstanding of $1.2MM (you may have borrowed more to grow your business), and cash of $100K.

Second, you’ll need to determine the terms and structure of the security you will be issuing to your investors (yes, you are issuing a security). Again for illustration purposes, we’ll assume that you will be issuing Preferred stock (the ‘why’ is beyond the scope of this article) in the amount of $1.95MM.

If you’ve noticed that the Preferred issuance is $1.95MM, and not $1.5MM, it’s not a typo. The reason you are issuing $1.95MM is because you, the Sponsor of the transaction, will be investing $450K of your $500K investment alongside the investors. The remaining $50K of your investment will go in as common.

This Preferred issuance will have a five-year maturity, will pay an 8% dividend in cash each year, and will have warrants for some percentage of the common equity of the business; again, the question is how much of the equity?

So, lets look at the math:

– Year 5 enterprise value (or terminal value) is equal to EBITDA times your exit multiple. Lets assume that there is no multiple expansion, so that the 4x you paid for the business is the same multiple for the terminal value. The terminal value $1.8MM x 4, or $7.2MM.

– Equity value is enterprise value, less debt, less preferred, plus cash (unrestricted cash). Therefore, equity value is equal to $7.2MM less $1.2MM (debt), less $1.95MM (preferred), plus $100K (cash), or $4.15MM.

– The IRR your investors are targeting is 30%. Since the investors are receiving 8% of their return in cash dividends, 22% of their return needs to come from the increase in equity value. The math then is $1.95MM (the face amount of the Preferred), times 1.22^5 (that’s 1 plus the 22% in IRR required from the equity build up to the power of 5, which is the maturity of the Preferred). Doing this math results in $1.95 x 2.7027, or $5.27MM.

– From the $5.27MM we subtract the face amount of the Preferred (return the initial investment) of $1.95MM and end up with $3.32MM of equity value that the Preferred investors need to receive in order to receive a 30% IRR (including the Preferred dividend payments of 8%).

– Finally, since we already determined that the expected terminal equity value is $4.15MM, then the Preferred Stock Issuance should end up with 80% of the equity in your transaction in the form of warrants – $3.32MM divided by $4.15MM.

– The remaining 20% of the equity goes to the common equity holder.

So what is the math to you, the Sponsor?

Since $450K of your investment went into the transaction as Preferred, you share in the returns of all the Preferred investors. Your share of the 80% of the equity to the Preferred Shareholders is 23.08% ($450/$1950), or $766K.

Next, since you are the sole common equity holder – the $50K of your total $500K investment – the remaining $830K of equity value ($4.15 – $3.32MM) goes to you for an IRR of approximately 75% (($830/50)^(.2)).

In all, you tripled your money for a blended IRR of 26% – (($766+$830)/$500)^(.2).

There you have it. Pricing your warrants on the back of an envelop in six easy steps.

Accredited Investor

Are you pitching your private placement to Accredited Investors? Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.”

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. A bank, insurance company, registered investment company, business development company, or small business investment company;

2. An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

3. A charitable organization, corporation, or partnership with assets exceeding $5 million;

4. A director, executive officer, or general partner of the company selling the securities;

5. A business in which all the equity owners are accredited investors;

6. A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

7. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

8. A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Using Warrants In Your Private Offering

If you’re in the market raising junior capital through a private offering, you will need to understand how warrants are used in structuring your offering. If you are floating a Private Placement of preferred stock or subordinated debt, your investors will expect to have warrants attached to their security.

What is a warrant?

A warrant is a security that gives the warrant holder the right to purchase equity at a specific price, within a certain time frame. Without the warrants, the investor or lender would only receive the dividend yield or interest rate on his shares or loan, hardly compensating him for the risk of making the investment. This equity-kicker is what gets investors excited.

Warrants are usually expressed as a percentage of the “fully-diluted” common stock of the company, which then equates to a certain number of common equity shares.

Fully-diluted refers to the total number of shares that would be outstanding if all conversions take place; e.g. convertible securities, employee stock options, and warrants, including the warrants which are part of your offering.

Warrants will usually have a “nominal” exercise price, also known as “penny warrants”. In the context of a buyout where the majority of the equity capital is in the form of preferred, the common equity will only have a nominal value. In other situations, the common equity may be valued at a higher number in which case i) the warrants will have an exercise price at the market value of the common equity, or ii) the warrants will have a nominal price, but the number warrant shares will be less.

As you structure your transaction and write your Private Placement Memorandum, you should become familiar with some terms that you’ll need to include in your term sheet:

Anti-dilution rights protect the warrant holder from equity dilution from a subsequent issuance of shares at a price lower than what the investor originally paid.

A simple example – suppose an investor received warrants for 20% of the equity for a preferred investment $1 million. If the Issuer subsequently issued another $1 million of preferred with warrants for 30% of the equity, the first investor would be diluted from 20% equity to 14% equity if there were not any anti-dilution protection language.

There are a number of ways to address anti-dilution, but that discussion is beyond the scope of this article.

Demand and piggyback registration rights refer to the right of the warrant holder to register his warrant shares for public issuance. The difference between the two types of registration rights is that Demand registration allows the holder to initiate the registration of warrant shares for public issuance. Demand registration is usually reserved for majority warrant holders, or warrant holders who have a significant ownership. Piggyback registration means that the warrant holder may have his warrant shares registered along with another holder or the company if there is a registering of the company’s shares. Piggyback rights are for the benefit of minority investors, as only the majority investors will have Demand registration rights.

Tag-along rights give a shareholder the right to join in a transaction to sell his shares if another shareholder is selling his stake.

Preemptive rights give shareholders the right to purchase new securities being issued by the company prior to them being issued to new, outside investors. In the dilution example above, a preemptive right would have given the first investor the right to purchase a proportional amount of the new issuance to preserve their equity ownership.

Note: since there would be an anti-dilution provision in the shareholders agreement, the anti-dilution provision would require waiver by the shareholders to proceed with the new issuance.

A Put Option allows the warrant holder to “put” the warrant back to the company. When the warrant is put to the company, the company has an obligation to purchase the warrant back from the investor. It is a way for the investor to monetize the value of his equity stake. The price that the company pays for the warrant is the product of the equity value of the company and the percent of the fully-diluted equity represented by the warrant shares.

A Call Option is a way for the company to “call” in the claims on its common equity. A company may call its equity back from investors if it anticipates an increase in the value of its equity down the road. It is also a way for the company to consolidate ownership back to, say the sponsors of the transaction.

I had a situation once where an investor requested that we eliminate the Call Option. His rationale was that he wanted to ride the value and did not the equity value get called away from him.

There are no rules for the number of years for the investor to have its Put right, or the Issuer to have its Call right, except that typically the advantage is to the investor with the Put right occurring before the Call right. My experience is that Put/Call rights will usually occur in years 4/5 or 5/6.

The issue you will face will be determining the value of the equity if and when the Put or Call gets exercised (except if there is a sale of the company to an unrelated third party).

I have been in transactions where the equity value for the purposes of the warrant was negotiated upfront as the greater of i) a liquidity event (such as a sale) or ii) a formula.

For example, if the original transaction was valued at 5x EBITDA, then the valuation for the Put/Call was also 5x EBITDA. Keep in mind that the product of a multiple and EBITDA gets you to an Enterprise Value, which is not the same thing as the equity value. To get to equity value, you’ll need to subtract debt and add cash (unrestricted cash).

My experience is that if there is no predetermined formula, the value of the warrant is usually negotiated. The “fair market value as determined by a …” language is for when you can’t agree; however, you should always have this language even if you have a formula.

As the Issuer you may find that the formula is based on the just-ended fiscal year, but by the time the audit gets completed, there might have been a material adverse change in the business such that the agree-upon formula overstates the value of the equity. Conversely, if you are the investor, events subsequent to the audit may point to a significantly higher equity value than what would be indicated following a formula using the year-end numbers.

Warrants are just another tool that help you raise the capital you need. The trickiest part of the whole warrant conversation will be anti-protection. As the Issuer you will want to run through a variety of scenarios to make sure you understand how your value will be impacted when anti-dilution triggers kick in.

Why A Private Placement Memorandum

Why would you need to draft a Private Placement Memorandum? Where do you go for capital if you run or own a private company? There are several sources of capital for privately held businesses. One is the capital generated internally by judiciously managing the company’s working capital. Another source is your local bank, which is the one the primary financing vehicles for private companies. And of course, there is always the owner’s pocket.

But where do you go if your capital needs outstrip what is available from a bank, especially if your company is in need of permanent capital to fund long term growth objectives, capitalize a start-up, or finance an acquisition? If you do not have the wherewithal to write checks yourself, you will need to raise outside capital.

Junior Capital
Junior capital is a term used to describe capital that sits below bank debt, and includes mezzanine, or subordinated, debt, and equity. Sources of junior capital include institutional investors, such as insurance companies, hedge funds, private equity funds, mezzanine funds and SBICs.

Individual Investors
Another source of junior capital is individual investors. This class of investor includes friends, family, and high net worth individuals. And if you are issuing securities to individual investors, you may be required by law to write and distribute a private placement memorandum to each of your potential investors.

Protect Yourself Against Securities Fraud Claims
Besides the compliance issues, there are two major reasons for preparing a Private Placement Memorandum. First is to give you cover against securities fraud claims. By writing and delivering a PPM, you are establishing a record of what has been communicated to the investors about the offering and the company. When issuing securities, state and federal law is most concerned with securities fraud issues. Anti-fraud requirements call for the issuer to not make any unture statements of a material fact, or to leave out a material fact, the absence of which would make any statements made misleading; i.e. the issuer must disclose all relevant and material facts of the issuance and the company. A well-prepared PPM will establish a record of the information presented to investors, and will provide a level of protection for the company and issuer against claims of securities fraud.

Professional Image
The other reason for writing a Private Placement Memorandum is that it presents a professional face to the issuance. The image presented to investors by presenting a document that is well-prepared is one of professionalism and competency. Approaching sophisticated investors with a poorly drafted offering document will scream “unprofessional”, “novice”, “don’t know what they’re doing” – the exact opposite of what you are trying to project.

There are many reasons to use a PPM. And now with the availability of PPM templates, the upfront costs of using a PPM are manageable.

Regulation D Offering

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read our publications on Rules 504, 505, and 506 of Regulation D.

While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

As an investor, if you are thinking about investing in a company that is issuing securities which have not been registered with the SEC, you should access EDGAR Company Search to determine whether the company has filed a Form D. If the company has filed a Form D, you can request a copy. If the company has not filed a Form D, this should alert you that the company might not be in compliance with federal securities laws.

You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900 or by visiting its website. You’ll also find this information in the state government section of your local phone book.


A Warrant, also called a Stock Warrant, is a certificate that entitles the holder (the person to whom the Warrant is issued) to purchase a certain number of shares of common stock, at a stated price, for a specified period of time. Warrants are the equity kicker which investors require to target their expected return Without the warrant, the return would be equal to the interest rate or dividend.

The amount of Warrants offered represents how much equity dilution you are taking, or how much equity you are giving up. The amount of equity you give up is a function of the investor’s expected return, which takes into account the dividend or interest rate, whether the dividend or interest is paid currently or accrued, and the value of the common equity at the end of the investment horizon.

Exercise Price

The exercise price of a warrant is the price at which the warrant holder pays for the common stock. In a private transaction, the exercise price warrant can be set at any price, and is typically set at $0.01 per share. A higher exercise price just means that the investor will require more shares to achieve the targeted return.

Cashless Exercise

A cashless exercise feature is a way to convert the warrant shares into common equity without writing a check. For example, if you have 5,000 penny warrants and the market value of the common equity is $5.00 per share. You would use 10 shares as currency to purchase your 5,000 shares at $0.01 per share, or $50.00. Your net proceeds would then be $24,950, or (5,000 – 10) x $5.00.

Put/Call Feature

Warrants will typically come with a Put/Call feature. The Put feature allows the warrant holder to monetize his investment by forcing the issuer to redeem the warrant. The Call feature allows the issuer to buy the warrant shares away from the warrant holder, which can be useful if the issuer believes that the value of the equity will be greater than it is at the time the Call is exercised.

The right to Put the warrant shares back to the issuer typically becomes available to the warrant holder any time after five years. The Call rights of the issuer will typically become available 12 months later, or after year six in this example if the Call is available after year five.

The Put or Call of a warrant is completed at the market price, which is tricky to say the least for a private company where the common equity is not traded. The Warrant Agreement should have language that either 1) predefines a formula to determine the value of the equity, or 2) provides for a process to determine the value of the equity.

Predefining the value of the warrant is straight forward, the simplest is assigning a multiple to the then-current EBITDA to arrive at an enterprise value. From the enterprise value subtract all debt and preferred stock, and add unrestricted cash to arrive at the equity value. The “exit multiple” is usually the “going-in multiple”. The downside of this methodology is that someone is potentially leaving money on the table; i.e. the company may be worth more or less than the value suggested by the formula.

Providing for a process to value the equity comes down to the hiring of a valuation firm to determine the value of the equity. In the event one of the parties disagrees with the value determined by the valuation firm, the warrant agreement should provide for a resolution that will usually allow for the dissenting party to hire a second valuation firm. If there is still disagreement, then the two valuation firms will hire a third firm with a final value determined by taking the average of all three valuations.