How to Answer “How would you value a company with multiple share classes (different voting rights / economics)?” in Investment Banking Interviews
In investment banking interview prep, a common advanced prompt is: “How would you value a company with multiple share classes (different voting rights / economics)?” The twist isn’t the enterprise value mechanics—it’s translating a single business value into class-specific equity values when cash-flow rights, convertibility, and control differ.
A strong answer shows you understand standard valuation techniques in investment banking (DCF / trading comps / precedent transactions) and the cap table logic needed to allocate value across multiple share classes in a way that is internally consistent and defensible.
What Interviewers Test: ib technical interview questions on share classes
Interviewers use this as one of the tougher IB technical interview questions to see whether you can separate (1) valuing the business from (2) valuing different securities that sit on that business. They want to hear you anchor on enterprise value (or total equity value) first, then explain allocation rather than improvising class-by-class “mini valuations.”
They’re also testing judgment around what actually creates value differences between classes: economic rights (dividends, liquidation preference, conversion ratios, participation), voting/control (which can justify a control premium in certain contexts), and liquidity/transfer restrictions (which can justify discounts). You don’t need to know every niche security feature, but you do need a clean way to incorporate the ones that matter.
Finally, they’re looking for clarity under pressure: can you ask a couple of targeted clarifying questions (public vs private, convertibility, any prefs), reference tools like a DCF with WACC at a high level, and finish with a practical allocation method (e.g., as-converted, OPM, or probability-weighted scenarios) plus sanity checks.
Valuation methods for share classes: a step-by-step framework
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Step 1: Clarify the share-class differences and the valuation objective
Start by confirming what differs across the classes—because the method depends on the rights, not the label “Class A/B.” In 1–2 questions, identify: (i) economic differences (dividend policy, liquidation preference, participation, conversion ratio, mandatory/optional conversion, caps), (ii) voting/control (super-voting, board rights, protective provisions), and (iii) liquidity/transfer (lockups, restricted shares). Also clarify whether it’s a public company (usually price-based allocation) or private / pre-IPO (often option-style methods).
Then state the objective: typically you value the operating business using standard valuation techniques in investment banking (DCF, comps, precedents) to get enterprise value, bridge to equity valuation, and then allocate that equity value across classes according to their contractual rights. Make it explicit that the underlying company value is common; the allocation is what varies by class.
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Step 2: Value the business first (EV → total equity value) using core methods
Explain that you would first estimate enterprise value using a DCF and/or multiples. In a DCF, you forecast free cash flows and discount them at WACC to arrive at EV, then adjust for net debt and other non-operating items to get total equity value. With trading comps and precedent transactions, you apply EV/EBITDA, EV/Revenue, P/E, etc., making sure the numerator/denominator match and the capital structure adjustments are consistent.
Call out that at this stage you do not try to “DCF each share class.” The business has one set of cash flows. Differences in voting rights typically don’t change EV directly (unless you’re specifically valuing control vs minority stakes), while differences in economics and contractual features affect how the total equity value is split. This framing is a key “interview-safe” foundation for answering valuation questions in investment banking.
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Step 3: Allocate total equity value across classes based on rights (as-converted vs preference stack)
Next, describe the allocation approach depending on the instrument features—this is the heart of valuation methods for share classes.
- If classes are economically identical and differ mainly in votes (typical dual-class public structures): value the company, compute total equity value, then allocate pro rata by shares outstanding (or as-converted if there’s conversion). Any incremental value of votes is usually small in liquid public markets; if you do adjust, you’d reference observed vote/control premia (or a modest control premium conceptually) and be conservative.
- If economics differ (prefs, liquidation preferences, participation, conversion ratios): build a waterfall. Start from total equity value and distribute proceeds in liquidation order: preferences first (including accrued dividends if relevant), then participation, then common, incorporating conversion decisions (convert if it yields higher proceeds).
Make clear that the output is a per-share value by class that reconciles back to the same total equity value and respects contractual terms.
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Step 4: Choose an advanced allocation technique when outcomes are uncertain (OPM / PWERM)
For private companies or structures where conversion and preferences matter and outcomes are path-dependent, explain two standard advanced approaches:
- OPM (Option Pricing Method): Treat equity classes as options on the company’s equity value, with strike prices set by the preference stack breakpoints. Use volatility, time to liquidity event, and risk-free rate to allocate value across classes. This is common for complex cap tables and aligns with how many practitioners think about preferred vs common.
- PWERM (Probability-Weighted Expected Return Method): Model discrete exit scenarios (e.g., IPO, sale, downside case), allocate proceeds via the waterfall in each scenario, then probability-weight and discount appropriately.
Tie it back to interview expectations: you don’t need to derive Black-Scholes, but you should know when you’d use OPM vs PWERM and what key inputs drive the allocation. This is often what differentiates strong candidates on advanced ib technical interview questions.
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Step 5: Sanity-check, reconcile, and communicate the conclusion succinctly
Close with checks and a crisp “so what.” Reconcile that: (i) the sum of class values equals total equity value, (ii) implied per-share values make sense relative to rights (preferred should not price below common if it has senior claims, all else equal), and (iii) the allocation responds correctly to changes in total equity value (e.g., in low-value outcomes, prefs capture more; in high-value outcomes, common participates more).
Also mention practical cross-checks: compare to current trading prices (if public), recent financing terms (if private), or implied control premium (if a control block is being valued). Finish by stating the output clearly: per-share value by class, key assumptions (conversion, preference terms, volatility/probabilities), and the main driver sensitivities. That communication piece is part of effective investment banking interview strategies.
Model Answer for investment banking interview prep (multi-class equity)
You generally don’t “value each share class” separately—you value the company first, then allocate the resulting equity value across the classes based on their rights.
I’d start by clarifying what differs: are the classes economically the same with different voting rights, or do they have different economics like liquidation preferences, dividends, or conversion features. Then I’d value the business using standard valuation techniques in investment banking—typically a DCF to get enterprise value by discounting free cash flows at WACC, and I’d triangulate with trading comps or precedents. From EV I’d bridge to total equity value by adjusting for net debt and other non-operating items.
Once I have total equity value, the approach depends on the structure. If it’s a dual-class public company where economics are identical, I’d allocate equity value pro rata based on shares outstanding (or as-converted), and I’d only discuss a voting/control premium if the context is specifically about valuing a control block.
If economics differ—say preferred shares with a liquidation preference and optional conversion—I’d build a waterfall: distribute proceeds in liquidation order, model whether preferred converts when it’s in its interest, and compute a per-share value for each class that reconciles back to total equity value. For more complex private-company cap tables, I’d mention using an option pricing method or a probability-weighted scenario approach to reflect uncertainty around exit outcomes.
I’d end with sanity checks—sum back to total equity value and confirm the relative values match the seniority and conversion terms—and call out the key sensitivities like total equity value, conversion thresholds, and any OPM volatility or scenario probabilities.
- Lead with “value the company, then allocate,” which is what interviewers want to hear.
- Ask 1–2 clarifying questions on economics (prefs/convertibility) vs voting-only differences.
- Name-check DCF/WACC and the EV→equity bridge to show core fundamentals before allocation detail.
- Offer multiple allocation tools (as-converted, waterfall, OPM/PWERM) and when you’d use each.
- Finish with reconciliation and sanity checks to show control and accuracy.
Common Pitfalls in valuation techniques in investment banking for dual-class stocks
- Trying to build separate DCFs for each share class instead of valuing the business once and allocating equity value.
- Ignoring liquidation preferences, participation, or conversion terms—these usually drive the value split more than voting rights.
- Assuming voting rights automatically mean a large premium without context (public trading vs control transaction).
- Forgetting to reconcile: per-class values should sum to total equity value implied by EV minus net debt.
- Mixing up enterprise value and equity value, especially when discussing comps vs per-share values.
- Overcomplicating OPM/PWERM mechanics; in interviews, what matters is when to use them and the key inputs.
Follow-ups: conversion, liquidation preferences, and control premiums
If the two classes have identical economics but different votes, do you apply a premium/discount?
Usually you allocate pro rata by shares (or as-converted). Any vote-related premium is context-specific (e.g., valuing a control block) and is typically supported by observed control premia rather than assumed.
How would you handle preferred shares with a 1x liquidation preference and optional conversion?
Build a waterfall: in low outcomes, preferred takes its preference first; in high outcomes, it converts if conversion yields more. Compute per-class values that reconcile to total equity value.
When would you use OPM vs PWERM for multiple share classes?
Use OPM when value is best viewed as option-like around breakpoints and you need a continuous distribution; use PWERM when you can define discrete exit paths (IPO vs sale vs downside) with probabilities.
Does the DCF discount rate (WACC) change by share class?
WACC is used to value the operating business (EV) and doesn’t change by share class; differences across classes are handled in the equity allocation step, not by changing the operating discount rate.
How do you sanity-check your per-share values by class?
Confirm the totals sum to implied equity value, check ordering versus seniority (prefs shouldn’t be worth less than common absent unusual terms), and test sensitivity to total equity value and conversion thresholds.
Investment banking interview strategies to practise share-class valuation
- Practise a 3-minute delivery that always starts with: “value the company, then allocate the equity value across classes.”
- Build a simple two-class waterfall on paper (common + 1x preferred with conversion) and rehearse explaining the breakpoints without maths overload.
- Prepare one line on OPM and one line on PWERM (when used + key inputs) for advanced follow-ups.
- Record yourself answering and check you say “enterprise value to equity value” clearly and reconcile the allocation back to total equity value.
- On AceTheRound, run this as a timed mock and ask for feedback specifically on structure and whether your allocation logic is internally consistent.
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