Utilizing the 'Market Approach' When Calculating Equity Value of Companies - A common Error

I would like to discuss about an error that is common among financiers, accountants, lawyers and even analysts when trying to analyze transaction data in the market.
(Learn more about the 'Market Approach' - )http://www.nysscpa.org/cpajournal/2004/1004/essentials/p50.htm

In many cases when one tries derive a fair value indication of a certain private company from transactions held in the company's stocks or options, he or she often tends to make an errors that can be rather confusing. I'll explain it with the following rather simple example.

Let’s say, I bought 50% of a certain company and paid US10M. Assuming that it's also considered an arm's length transaction in the market, if I asked you guys, how much do you think is the fair value of 100% of the equity of the company? I bet that you'll immediately say US20M without even questioning your response.
Would you change your answer if I told you I had bought only preferred shares, and the rest are common shares being hold by others? How much would agree to pay for 100% of the equity? Do you still think it's worth US20M? Why?
Well, things are not that simple as they seem. In the business world and especially on the turf of the VCs, execution of deals is getting more and more complicated. To secure stockholders or creditors companies issue a wide range of equity instruments (i.e common shares, preferred shares, convertible bonds, options etc). In those 'weird cases', those 'back of the envelope calculations' would give us misleading values.
For that reason analysts first try to understand the deal structure and the equity or debt instruments that were purchased. By using more complex models they strive for a more reasonable indication of fair value.
(For an example on how to calculate fair value among different classes of shares see also www.journalofaccountancy.com/Issues/2008/Mar/AllocatingValueAmongDifferentClassesofEquity)

Adding some more details to the question above, I tell you now that company has 50 common shares and 50 preferred shares. And I bought the whole 50 preferred shares which indeed entitle me to 50% of the voting rights but that does not necessarily mean it's exactly 50% of the rights for earnings.
Logically, the 50% in preferred shares that I bought for 10 million is worth more than the remaining 50% in common shares since the preferred shares legally hold additional rights (e.g liquidation preferences, ratio of conversion to common stock in the future etc ) and thus in most cases:

FV (1 preferred share) > FV (1 common share)

To simplify the answer, theoretically the company is worth less than US20M.

In a nut shell, I advise players in the market (especially entrepreneurs) to give special attention to rights embedded in different equity instruments when executing deals and when determining the price of assets/ventures/companies.

I hope it gives you some food for thought.

Gadi