Valuing Early Stage and Venture-Backed Companies

by Beaton, Neil J.

• ISBN13: 9780470436295
• ISBN10: 0470436298
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-03-29
• Publisher: Wiley

Summary

Valuation of Early Stage Companies is an updated analysis and application of valuation theory for early stage companies with complex capital structures. The book shows the appropriate and defensible way to prepare and present business valuations with a strong emphasis on applications and models. This book dispels improper valuation techniques promulgated by unknowing business appraisers. It provides the valuation theory, the consensus view on application, and the tools to apply it. Strong emphasis is on applications and models versus pure theory. Chapters and procedures are contribute by top valuation experts.

Author Biography

Neil J. Beaton, CPA/ABV, CFA, ASA, is a nationally known business valuation expert and speaker on the valuation of early stage companies. He is the National Partner in Charge of Valuation Services for Grant Thornton, LLP, an international audit, tax, and financial advisory services firm. He has more than twenty-seven years of professional experience and is a recognized expert witness in state and federal courts as well as international tribunals. He has authored an AICPA publication on valuing stock options and intangible assets for financial reporting purposes.

Table of Contents

Preface	p. ix
Acknowledgments	p. xi
About the Author	p. xiii
Laying the Foundation	p. 1
A Unique Landscape	p. 1
An Overview of the Venture Capital Industry	p. 8
Conclusion	p. 14
Understanding Early Stage Preferred Stock Rights	p. 17
Stock Rights	p. 19
Contractual Rights	p. 28
Conclusion	p. 32
Enterprise Valuation Approaches	p. 35
Relevancy of Traditional Valuation Approaches	p. 35
Cost Approach	p. 40
Market Approach	p. 43
Income Approach	p. 45
"Vectoring" Valuation Approach	p. 46
The Income Approach as an Oxymoron	p. 53
Conclusion	p. 58
Application of the Option-Pricing Method in Allocating Enterprise Value	p. 59
Important Assumptions Underlying the Option-Pricing Model	p. 61
Option-Pricing Method Steps in Application	p. 66
Other Considerations in the Option-Pricing Method	p. 86
Pros and Cons of the Option-Pricing Model	p. 87
Conclusion	p. 88
Application of the Probability-Weighted Expected Returns Method in Allocating Enterprise Value	p. 89
Illustration of the PWERM	p. 90
PWERM Critical Assumptions	p. 94
Overview of Stock Rights	p. 96
Identification of Outcomes	p. 98
Updating PWERM Analyses	p. 104
Conclusion	p. 105
Applicable Discounts for Early Stage Companies	p. 107
Basis of Discounts	p. 108
Suggested "Corrections" to the Current Use of Put Models for Quantifying DLOMs	p. 114
Dilution Discount	p. 119
The Likelihood of Liquidity	p. 120
Conclusion	p. 123
Advanced Valuation Topics for Early Stage Companies	p. 125
Utilizing the OPM as a "Valuation" Methodology	p. 127
Sequential and Compound Options	p. 127
Allocating the Residual Value	p. 131
Further Extensions for Compound Options	p. 137
Venture Capital Rates of Return	p. 139
Executive Stock Compensation	p. 143
Conclusion	p. 143
Allocation of Enterprise Value Using the Option-Pricing Method: Treatment of Derivatives on Common Stock	p. 145
Volatility in the Option-Pricing Model	p. 155
Notes	p. 175
Index	p. 179
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