Valuation, GAAP, and Market Capitalization

Core principle: An investment transaction may provide evidence of economic value. The applicable accounting rules determine what the company may recognize in its financial statements.

Different measures answer different questions

“Value” has several meanings. Always identify what is being valued, when, and for what purpose.

economically? Appraised value A valuation professional’s estimate for a defined purpose and date What value does the analysis support under its assumptions?

Fair value An accounting measurement based on an orderly transaction between market participants at the measurement date What market-participant measurement applies when the accounting rules require or permit it?

Carrying value The amount recorded for an asset or liability in the financial statements

What amount is currently on the books?

Book equity Recorded assets minus recorded liabilities What net amount belongs to equity holders under accounting measurements?

Market capitalization Public share price multiplied by outstanding shares What market value is assigned to the company’s equity?

Enterprise value A measure of business value that commonly adjusts equity value for debt, cash, and other financing interests What value is assigned to the business across capital providers?

Offering valuation A valuation stated or implied by an offering’s price and terms At what valuation are investors being asked to participate?

An appraisal is an estimate. An offering price is a proposed transaction term. A completed transaction provides evidence, but its interpretation still depends on the rights sold and the circumstances.

Questions an SDR should ask: Is that figure an appraisal, a completed investment valuation, a balance-sheet amount, or the company’s stock-market value?

Does it describe the asset, the subsidiary, or the parent company? These questions prevent different measures from being presented as interchangeable.

What is GAAP?

GAAP means Generally Accepted Accounting Principles. U.S. GAAP provides requirements for preparing financial statements, including when items are recognized, how they are measured, and what disclosures accompany them.

The Financial Accounting Standards Board, or FASB, establishes financial accounting standards for nongovernmental entities. Its Accounting Standards Codification, or ASC, organizes authoritative U.S. GAAP.

[R16] Three terms matter throughout this chapter:

A company may discuss a resource in its disclosures without recognizing that resource at management’s estimated value.

Why valuable IP may have a low carrying value A business may create valuable technology while recording much of the development spending as expenses.

Expensing means recognizing a cost in the period’s earnings rather than recording it as an asset. Capitalizing means recording an eligible cost as an asset, subject to the applicable accounting requirements.

Under U.S. GAAP, research and development costs are generally expensed as incurred, with specific exceptions and separate guidance for certain costs, including software. FASB’s discussion of intangible recognition describes these distinctions. [R17] Hypothetical example: A company spends $8 million developing technology over several years.

Assume:

• The relevant costs were properly expensed.
• No other costs qualify for separate capitalization.
• A later appraisal estimates the technology’s economic value at $30 million.

technology $0

Appraised economic value $30 million

These figures measure different things. The $0 carrying value does not establish that the technology is worthless. The $30 million appraisal does not automatically authorize recording a $30 million asset.

SDR explanation: The company may have economically valuable technology even though its development costs were expensed. Its financial-statement amount follows the applicable accounting rules.

What “tokenization does not override GAAP” means

Tokenization changes how an investment or right is digitally represented. It does not create a general exception to asset-recognition or measurement requirements.

Before recording an amount, the accounting team must determine:

• What transaction actually occurred?
• Which entity is reporting it?
• What rights or obligations were created or transferred?
• Which accounting guidance applies?
• What recognition and measurement does that guidance require? Hypothetical example: The company from Section 5.4 creates tokens connected to a financing involving its technology.

Its appraisal remains $30 million. Creating those tokens does not, by itself: Reverse previously recognized development expenses; Establish a sale of the technology; Establish that another party owns the technology.

• Permit a $30 million accounting write-up. The accounting result follows the actual transaction and applicable standards.

Recognition comes before measurement

A useful distinction is: “We can estimate a value” answers a measurement question. “We may record this item” answers a recognition question.

A reliable estimate alone does not establish that a particular asset may be recognized or remeasured. Internally developed and acquired IP can receive different treatment The way a company obtains an asset can affect its accounting.

Situation General accounting consideration

Internally developed IP Many costs are expensed; specific guidance may permit capitalization of qualifying costs Separately purchased IP Acquisition costs may establish a recognized asset, subject to the applicable requirements IP acquired in a business combination Identifiable intangible assets are generally recognized separately from goodwill under acquisition accounting Transfer within a corporate group Moving an asset between entities does not automatically create a new consolidated fair-value basis FASB’s materials explain the distinction between internally generated intangibles and acquired intangibles, including recognition in business combinations. [R17] Goodwill is an acquisition-accounting amount representing the residual after the applicable acquisition measurement and allocation. It is not a general account used to record management’s estimate of internally created business value.

Software requires particular care

Avoid saying, “All internally developed software must be expensed.” Software has specific accounting requirements. FASB issued updated internal-use software guidance in 2025, generally effective for annual periods beginning after December 15, 2027, with early adoption permitted. The accounting team must identify the guidance applicable to the reporting period. [R18] For SDR purposes, gather whether software costs have been capitalized and whether the company’s accountants have reviewed the treatment.

Market capitalization: the actual calculation

For a simple company with one publicly traded common-share class:

Market capitalization=Share price x Outstanding shares

Investor.gov defines market capitalization using the current public share price and total outstanding shares. [R19]

Hypothetical example

Now assume an appraisal values the company’s IP at $30 million. The calculation does not become: $40 million market capitalization + $30 million appraisal = $70 million market capitalization.

If the share price and outstanding share count remain unchanged, market capitalization remains $40 million. The market may already reflect some or all of the IP’s expected benefits in the $2.00 share price.

How better information could affect market capitalization

A company might provide credible information about licensing revenue, financing, commercialization, or an investment transaction.

Investors may use that information to revise their expectations about future performance and risk. Hypothetical market response: Assume the share count remains 20 million.

Scenario Share price Market capitalization

Before new information $2.00 $40 million

Investors respond positively $2.50 $50 million Investors see no material change $2.00 $40 million Investors respond negatively $1.75 $35 million These are illustrative outcomes, not predictions.

The increase to $50 million occurs because the share price increases. It does not occur through adding an appraisal to the market-capitalization formula.

SDR explanation: A well-supported transaction may help investors evaluate the company’s assets and prospects. Any market-capitalization effect depends on the market’s response and the outstanding shares.

Asset value, equity value, and enterprise value

These measures describe different interests. Simplified subsidiary example: Assume an IP subsidiary has:

• Assets with an estimated economic value of $30 million.
• Debt of $8 million.
• No other relevant adjustments. A simplified estimate of equity value would be: $30 million-$8 million=$22 million This calculation is an illustration, rather than a complete appraisal. Taxes, expenses, restrictions, other obligations, and the rights attached to shares can affect the result.

Simplified enterprise-value example: Assume a public company has:

• Market capitalization of $40 million.
• Debt of $10 million.
• Cash of $5 million.
• No preferred interests, noncontrolling interests, or other adjustments. A common simplified calculation is:

Enterprise value=$40+$10-$5=$45 million

Always state the calculation used. Enterprise-value conventions and adjustments vary. Training point: A $30 million asset estimate, a $22 million subsidiary equity estimate, and a $45 million parent enterprise value cannot be substituted for one another.

Offering valuations and completed transactions

A completed investment can provide useful valuation evidence. First identify what the investor purchased.

Hypothetical IP-subsidiary offering

An investor contributes $5 million for 20% of the subsidiary’s ordinary equity after the financing. Assume all shares have comparable rights and there are no other adjustments.

Post-money equity valuation=($5 million) / (20%)=$25 million Pre-money equity valuation=$25 million-$5 million=$20 million Pre-money valuation is the equity valuation immediately before the new investment.

Post-money valuation includes the new investment.

What this establishes-and what it does not

The terms imply a $25 million post-money equity valuation under those assumptions. They do not necessarily establish:

• That the patents alone are worth $25 million.
• That every shareholder interest has the same value.
• That the parent company can add $25 million to its market capitalization.
• That GAAP permits a $25 million intangible-asset balance. Preferred rights, guarantees, redemption terms, control rights, and other provisions can materially affect interpretation.

SDR question: What rights accompanied the investment, and does the stated valuation include the new cash?

Raising money is different from revaluing an asset

An offering can change the balance sheet without changing the carrying value of the underlying IP. Simplified secured-note example: Assume a company receives $10 million by issuing debt accounted for as a straightforward borrowing. Ignore fees, discounts, derivatives, and other complications.

measures.

A subsidiary transaction requires a consolidated view

Consolidated financial statements present a parent and its consolidated subsidiaries as one reporting group. Moving IP into a subsidiary does not automatically create new economic value for the group or permit a fair-value write-up.

A subsequent outside investment requires additional analysis of matters such as: Whether the parent retains control; What rights the outside investor receives; Whether the subsidiary remains consolidated; How the proceeds and outside ownership are accounted for.

Noncontrolling interest describes an ownership interest in a consolidated subsidiary held by parties other than the parent.

Avoid double counting

If a parent owns 80% of a subsidiary, the parent’s investors may already value that interest as part of the parent’s business.

Adding the subsidiary’s full valuation to the parent’s existing market capitalization can count the same expected benefits twice.

The finance team must assess the retained interest, obligations, transaction terms, and valuation basis.

Token trading prices require interpretation

A token’s quoted price may relate to: A common share; A preferred share; A debt unit; A royalty payment right; An indirect entitlement; A different contractual arrangement.

The price measures the interest traded, under the circumstances of that market. Hypothetical example: A subsidiary has one million equal ownership units. A small trade occurs at $30 per unit.

Multiplication produces an indicated value of $30 million. However, that trade may not demonstrate that:

• All units could be sold at $30. A large block has the same value; The subsidiary’s assets individually have that value; The price satisfies an applicable accounting measurement requirement.

The valuation team considers volume, market activity, restrictions, comparability, and transaction circumstances.

“Marking to market” does not apply to everything

Marking to market commonly refers to updating a recorded amount using market-based values under applicable accounting requirements.

It is not a general permission to increase every asset whenever a higher price becomes observable. FASB’s fair-value guidance for certain crypto assets has a defined scope. Among other conditions, assets within that scope must not provide enforceable rights to underlying goods, services, or other assets, and must not be issued by the reporting entity or its related parties. [R20] Therefore, a token representing a share, note, or IP-related claim does not automatically receive that crypto-asset accounting treatment.

SDR explanation: The accounting team classifies the instrument and applies the relevant guidance. Using a token format does not determine the accounting category.

Common valuation approaches

information

Sales or licenses involving comparable rights

Cost approach The cost to replace or reproduce relevant utility, with adjustments

Recreating comparable software capabilities

Discounting converts estimated future cash flows into a present-value estimate using a rate reflecting timing and risk.

Obsolescence describes a loss of usefulness or economic relevance. An appraisal should identify its purpose, date, asset scope, assumptions, methods, and limitations.

Development spending alone does not establish value. A valuation of gross receipts also differs from a valuation of cash flows remaining after costs and obligations.

What this means for the five structures

Structure Main valuation and accounting questions

Tokenized secured notes Can the issuer repay? What are the collateral rights and recoverable value? How is the instrument classified?

Royalty-linked instruments Which cash flows support payments? What deductions, duration, caps, and risks apply?

Tokenized preferred shares What value attaches to dividend, liquidation, conversion, and redemption terms? Tokenized IP-subsidiary shares What does the subsidiary own? What are its obligations, expenses, and relationship with the parent?

Tokenized parent-company shares What are the share-class rights, offering price, dilution effects, and implications for existing shareholders?

The relevant valuation follows the actual investment rights. Accounting follows the applicable standards and reporting entity.

Accurate SDR language

value.” “The token price reflects the traded instrument and market circumstances.” “The subsidiary structure guarantees a write-up.” “The accountants must evaluate the transaction and consolidated treatment.”