During the IPO process, why do we subtract IPO proceeds when calculating Equity Value?

When calculating Equity Value during the IPO process, the subtraction of IPO proceeds is necessary to accurately reflect the true asset value of the company from the perspective of existing shareholders. This is because the proceeds from the IPO represent new capital being raised by the company, which typically increases the cash on the balance sheet but does not directly correspond to the existing equity held by current shareholders.

By subtracting the IPO proceeds, we ensure that we are looking at the value that is attributable solely to the existing assets and liabilities, thus providing a clearer picture of the equity value before the infusion of new capital changes the company’s financial composition. The true asset value must be reflective of what the existing shareholders own, rather than the inflated amount that includes funds that will benefit the company in the future but are not part of the existing equity landscape prior to the IPO.

In this context, the other options do not correctly capture the rationale behind the subtraction of IPO proceeds from the calculation of Equity Value. For instance, the notion of viewing IPO proceeds as liabilities is misleading, as they are an infusion of cash rather than a debt. Also, considering these proceeds as a means to account for new cash infusion does not align, since the intention is to remove the impact of the new funds to