Secure Workflows: Protecting Data in Global Outsourced Operations
18 DECEMBER 2025
Case Overview:
The client, a company in the healthcare sector, had a notably complex capital structure that posed several valuation challenges. The capitalization table included multiple classes of equity, such as preferred units, common units, and incentive units. Additional complexity arose from a subset of common units with unique characteristics that differed from the standard structure.
Complexity:
One of the primary challenges encountered during the valuation process stemmed from the interpretation of the company’s operating agreements. These documents were intricate and required careful examination to understand the specific rights, preferences, and participation features associated with each unit class. A key issue involved the Q1 units, which were structured in a highly unique manner. According to the agreement, Q1 units were designed to dilute only the “attached” common units, while having no dilutive impact on any other class of equity, including regular common units, preferred units, or incentive units. This selective dilution mechanism was unusual and required detailed legal and financial interpretation to ensure correct implementation in the valuation model.
Another significant challenge lay in modeling the dilution impact of the Q1 units in a manner that accurately reflected the economic realities outlined in the operating agreement. Traditional methods of modeling equity dilution did not accommodate the bespoke structure of the Q1 units, necessitating the development of a custom approach.
Windy Street’s Solution
To address the complexities of the capital structure and accurately determine the fair market value (FMV) of the various equity classes, the Windy Street team adopted a two-step valuation approach.
Step 1 – Waterfall Model and Option Pricing Model (OPM):
Initially, the team constructed a detailed waterfall model to allocate the total equity value of the company across the different classes of unit holders. This waterfall was built in alignment with the rights and preferences outlined in the operating agreement. An Option Pricing Model (OPM) was then applied to determine the value of the equity tranches. Importantly, in this phase, the Q1 units were deliberately excluded from the model, while the “attached” common units were included. This was done to isolate the value attributable to the “attached” common units before accounting for the dilution impact of the Q1 units.
Step 2 – Secondary Black-Scholes Analysis:
Following the initial equity allocation, a secondary analysis was performed to assess the value of the Q1 units. The equity value previously assigned to the “attached” common units through the OPM was now used as the basis for this second step. A separate Black-Scholes model was employed to redistribute that value between the Q1 units and the “attached” common units, in accordance with the terms of the operating agreement. This enabled the team to derive the fair market value of the Q1 units while adhering to the structure’s unique dilution mechanics.
This tailored and methodical approach allowed Windy Street to accurately capture the economic substance of the complex capital structure, delivering a defensible valuation that could stand up to scrutiny from auditors, legal advisors, and regulatory bodies.
