Venture Capital Valuation, + Website Case Studies and Methodology

by Carver, Lorenzo

• ISBN13: 9780470908280
• ISBN10: 0470908289
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-12-27
• Publisher: Wiley

Summary

Very few of the decision makers involved in a venture backed company have a definitive understanding of how valuation techniques are being applied to their financial statements and their decision making process. This casebook provides a quick and accurate road map on how valuation techniques used for tax, financial reporting and deal structure impact a company's past, present and future. The book includes real world case studies to simplify this complex subject for the practitioners serving companies, the founders and executives running the companies, and the investors that fund the companies.

Author Biography

Lorenzo Carver, MS, MBA, CVA, CPA, is CEO of Liquid Scenarios, a technology-based financial business intelligence solution company that provides services to investors, practitioners, entrepreneurs, and academics on how to measure and realize high-growth venture value. Carver has a twenty-year track record of helping thousands of clients understand how to measure and realize high-growth venture value. He is the author and developer of BallPark Business Valuation, the #1 selling, award-winning small-business valuation solution software covered by Bloomberg Businessweek, Entrepreneur, CPA Software News, The Kim Komando Show, and business journals worldwide.

Table of Contents

Acknowledgments	p. ix
Introduction What You Don't Know About Valuation Will Cost You Money	p. 1
Using Facebook, Twitter, and Linkedln to Explain VC Valuation Gains and Losses: How VCs, Angels, Founders, and Employees Give Up Investment Gash How Every Day	p. 13
Did Valuation Ignorance Cost ConnectU (and the Winklevosses) $50MM?	p. 14
An Expert Doesn't Need a 409A Valuation When He or She Has a Certificate and Basic Math	p. 15
Valuing Facebook's Common Stock Compared to Preferred Stock in Minutes	p. 16
What the Winklevosses Would Have Seen in Any 409A Valuation Report	p. 19
Deriving a Discount for Lack of Marketability for Valuations	p. 27
Facebook at $80 Billion Valuation versus Enron at $80 Billion Valuation	p. 35
Deal Terms, Waterfalls, and the Pre-Money Myth	p. 36
The Pre-Money Myth	p. 44
Summary	p. 56
Should Venture-Backed Companies Even Consider a DCF Model?: Introducing the life Science Valuation Case: Zogenix	p. 57
Zogenix: Company Background Summary and Highlights	p. 58
Leaping Forward Just 20 Months, the Company Files for an IPO	p. 64
Order of Valuations Presented in This Case	p. 67
Valuation Methods versus Allocation Methods Regarding Zogenix	p. 69
Separating Enterprise Value from the Allocation of That Value	p. 69
Valuing Total Equity	p. 72
Using Future Value (FV) and Present Value (PV) to Value Future Cash Flows Today	p. 79
Summary	p. 82
Applying the Typical DCF Model to a Venture-Backed Company Hardly Ever Works	p. 85
The Gordon Growth Model	p. 85
High Growth Limits the Gordon Growth Model	p. 87
Dividend Irrelevance and Capital Structure Irrelevance	p. 90
Using Comparables (Generally Market Multiples) to Generate a Terminal Value	p. 91
Actual Differences between Angels and VCs versus Perceived Differences	p. 100
Applying Valuation Methods and Allocation Methods at Inception	p. 102
Summary	p. 104
"Enterprise Value" + "Allocation Methods" = Value Destruction: Undervaluing Companies and Overvaluing Employee Options	p. 107
Most 409A Valuations Undervalue the Company and Simultaneously Overvalue Employee Stock Options	p. 107
Did Auditors Drive Valuators to Overvalue Employee Stock Options?	p. 109
Most 409A Enterprise Value Calculations Ignore the "Takeover" Value of Preferred	p. 113
The Realistic Range of Possibilities Depends on Who the Investors Are	p. 119
Overstating Returns and Understating Returns on the Same Asset (Simultaneously)	p. 125
"What Happens to Fund IRRs When You Assume Book Value Equals Market Value?	p. 128
The Real Cost of Fair Value, Fair Market Value, and Enterprise Value	p. 132
Yahoo! Case	p. 137
Why You Should D.O.W.T. (Doubt) Venture Capital ReturnsùOption Pool Reserve	p. 159
Unissued Option Pools	p. 159
Value Conclusion Elements Impacted by Option Pool Reserve Assumptions	p. 161
Impact on Parties Relying on Assumptions of VC Investments	p. 176
If Valuation Can't Make You Money, Do You Really Need It?: Learning Practical Applications from Kayak.com	p. 183
Applying Studies to Real-World Cases	p. 186
Important Questions to Ask	p. 213
Summary	p. 223
Don't Hate the Appraiser (Blame the Auditor Instead)	p. 225
Interview with Jeff Faust, AVA	p. 226
Summary	p. 236
Don't Blame the Auditors (Blame the Practice Aid Instead): 409A Valuation Professionals Discussing Topic 820 (FAS 157) WithVCCFOs	p. 287
Introduction to the Expert Panelists	p. 238
The Auditor's Valuation "Bible"	p. 239
SAS101 Tests, PWERMS, and OPMs	p. 240
Pwerms and rNPV/eNPV Models	p. 243
Subjectivity and the PWERM (or "Power") Method	p. 243
Finding Inputs for the OPM Model	p. 245
Enterprise Values versus Allocations	p. 246
Next Round Pricing and Topic 820	p. 248
Different Ways of Treating Granted, Unvested, and Reserved Options	p. 250
Valuing Warrants in Venture-Backed Companies	p. 252
Quantifying Qualitative Inputs to Value Conclusions for VC-Funded Companies	p. 253
Discounts for Lack of Marketability (DLOM) and Venture-Fund Portfolios	p. 254
Sharespost, Second Market as Market Inputs	p. 258
Summary	p. 262
Chapter 10Mow That You Understand Venture Capital Valuation, Share It	p. 263
About the Author	p. 269
Index	p. 271
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