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Understanding Valuation for Equity Compensation and Avoiding the Perils of 409A

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Venture Co. 409 A Sample Report …

Venture Co. 409 A Sample Report

If you are a CEO or a CFO of a high growth startup, it is vital to understand how to value your company correctly.

Here is a quick list of questions this lunch will help you answer:

Do you offer or are you planning to offer your employees stock options? Do you know the difference between ISOs and non-ISOs? Do you understand the general valuation concepts and approaches that the IRS has outlined, especially as they apply to early-stage companies? Did you know that if you run afoul of the 409A rules, your employees could have an unpleasant tax surprise and that some of that responsibility could revert back to you as the employer? Do you know if and when you need to engage an outside expert to assist with a valuation?

www.thecapitalnetwork.org

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  • 1. Stock Valuation ReportPrepared forVenture Co.November 16, 2012San Francisco Office580 California Street, Suite 516San Francisco, CA 94104+1 (415) 283-3284Boston OfficeOne Broadway, 14th FloorCambridge, MA 02142+1 (617) 684-5510Salt Lake City Office45 West 10000 South, Suite 209 Sandy,UT 84070+1 (801) 413-3930South America OfficeRafael Nunez 3835 Of. 10Cordoba - 5000Cordoba, Argentina+54 (0351) 568-1850 Ext.888
  • 2. ii | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tNovember 16, 2012Mr. Joe BigsbyChief Executive OfficerVenture Co.Dear Mr. Bigsby:Venture Co. (“Venture Co.” or the “Company”) has retained Scalar Analytics, LLC (dba Scalar Analyticsherein referred to as “Scalar” or “Scalar Analytics”) as an independent, qualified financial advisor toprovide an estimation of the fair market value (the “Opinion”) of the Company’s Common Stock (the“Subject Security”), as of September 30, 2012 (the “Valuation Date”) (the “Engagement”). While VentureCo.s management (“Management”) may use the results of this Opinion for financial reporting related toAccounting Standards Codification Topic 718 ("ASC 718") and tax reporting purposes related to InternalRevenue Code Section 409A (“IRC 409A”), Scalar does not assume any liability in furnishing thisOpinion.Purpose and ScopeFor purposes of performing our analysis, Venture Co.s management provided us with financial data andother pertinent records and documents pertaining to the Company’s operations and assets. Thisinformation has been accepted as a proper representation of Venture Co.s operations and condition. Wedid not, however, independently verify information provided to us, and maintain that the validity of thevaluation depends on the completeness and accuracy of the information provided to Scalar.These materials and their conclusions are intended to be used by the Board of Directors and Managementof the Company for the exclusive purpose of compliance with IRC §409A – specifically, as the basis forestablishing a strike price for the Company’s option grants – and as an input for ASC 718 compliance.We make no representation as to the accuracy of this Opinion if it is used for any other purpose withoutthe written consent of Scalar Analytics. This Opinion should not be considered, in whole or in part, asinvestment advice by anyone.Summary of FindingsBased on our analysis, Scalar estimates that the value of the Subject Security on a non-marketable,minority basis is:$0.484 per share
  • 3. iii | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tScalar has applied traditional valuation techniques and methods in determining the fair value of VentureCo.s equity including market, income, and cost valuation approaches. Specifically we have valued theCompany using the most current valuations of publicly traded comparable companies, comparableprivate acquisition and investment transactions, and the discounted cash flow valuation approach. Wehave also deployed commonly accepted allocation methods in determining the final value of theCompany’s stock.Our review also included factors external to the Company such as the state of the broader U.S. economy,the development of their target markets and the pace of adoption of their chosen technology platforms.Scalar Analytics has used valuation techniques and methods in accordance with recommendations by theAmerican Institute of Certified Public Accountants (AICPA) in their Audit and Accounting Practice.This report is subject to the terms and conditions of the Agreement as outlined in the engagement letterexecuted between Scalar Analytics, LLC and Venture Co.Sincerely,___________________________________________ Date: November 16, 2012Scalar AnalyticsPrincipal AppraiserTodd Miller, AVAContributing AppraisersLuis Coronel
  • 4. iv | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tTable of ContentsEngagement Overview ..................................................................................................................................1Background ...............................................................................................................................................1Engagement Purpose and Scope ...............................................................................................................1Standard of Value......................................................................................................................................1Premise of Value .......................................................................................................................................2Sources of Information..............................................................................................................................2Analysis of Subject Entity and Related Nonfinancial Information ...............................................................3Company Description................................................................................................................................3Management..............................................................................................................................................3Stage of Development ...............................................................................................................................3Risks ..........................................................................................................................................................4Industry Specific Risks ..........................................................................................................................4Company Specific Risks ........................................................................................................................4Economic Risk.......................................................................................................................................4Competitive Risk ...................................................................................................................................5Industry Overview.........................................................................................................................................5Software as a Service ............................................................................................................................5Economic Overview ......................................................................................................................................8Financial Statement Analysis ......................................................................................................................11Valuation Approaches and Methods Considered ........................................................................................11Asset Approach........................................................................................................................................11Market Approach.....................................................................................................................................11Income Approach ....................................................................................................................................12Valuation Approaches and Methods Used ..................................................................................................12Asset Approach (Not Applicable)............................................................................................................12Cost Approach.........................................................................................................................................13Market Approach.....................................................................................................................................13Recent Securities Transactions (Applicable).......................................................................................13Comparable Public Companies (Applicable).......................................................................................14
  • 5. v | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tComparable Transactions (Applicable)...............................................................................................14Income Approach ....................................................................................................................................15Discounted Cash Flow (Applicable) ....................................................................................................15WACC Calculation...............................................................................................................................15Weighted Average Value.............................................................................................................................16Allocation Methods .....................................................................................................................................16Option Pricing Method............................................................................................................................17Valuation Adjustments................................................................................................................................18Discount for Lack of Marketability (“DLOM”)........................................................................................18Put Option Analysis.............................................................................................................................19Asian Put Option (Finnerty)................................................................................................................19Small Company Risk Premium................................................................................................................20Company Specific Risk Premium ............................................................................................................20Valuation Analyst Representation...............................................................................................................22Conclusion of Value ....................................................................................................................................23Purpose of Report....................................................................................................................................23Assumptions and Limiting Conditions ....................................................................................................23Conclusion...............................................................................................................................................25Valuation Analyst Qualifications ................................................................................................................26Exhibits........................................................................................................................................................27Exhibit A: Valuation Summary ...........................................................................................................27Exhibit B: Recent Securities Transaction Backsolve ...........................................................................28Exhibit C-1: Public Comparable Companies Analysis .........................................................................29Exhibit C-2: Public Comparable Companies Analysis .........................................................................30Exhibit C-3: Public Comparable Companies Analysis.........................................................................31Exhibit D-1: Public Comparable Companies Descriptions ..................................................................32Exhibit D-2: Public Comparable Companies Descriptions ..................................................................33Exhibit D-3: Public Comparable Companies Descriptions ..................................................................34Exhibit E-1: Comparable Transactions Analysis..................................................................................35Exhibit E-2: Comparable Transactions Analysis..................................................................................36
  • 6. vi | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit F-1: Comparable Transactions – Target Company Descriptions.............................................37Exhibit F-2: Comparable Transactions – Target Company Descriptions.............................................38Exhibit F-3: Comparable Transactions – Target Company Descriptions.............................................39Exhibit F-4: Comparable Transactions – Target Company Descriptions.............................................40Exhibit G: Historical and Projected Income Statement.......................................................................41Exhibit H: Historical and Projected Balance Sheet .............................................................................42Exhibit I: Projected Cash Flow Statement...........................................................................................43Exhibit J: Discounted Free Cash Flows ...............................................................................................44Exhibit K: WACC & Terminal Value Calculation ................................................................................45Exhibit L: Capitalization Table Analysis .............................................................................................46Exhibit M: Break Point Analysis..........................................................................................................47Exhibit N: Option Pricing Method ......................................................................................................48
  • 7. 1 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tEngagement OverviewBACKGROUNDPer the engagement letter executed between the parties, Scalar Analytics has completed an analysis ofVenture Co. (“Venture Co.” or the “Company”) as of September 30, 2012 (“Valuation Date”), todetermine the fair market value of the Company’s Common Stock (the “Subject Security”) on a non-marketable, minority interest basis.ENGAGEMENT PURPOSE AND SCOPEIn October 2004 the IRS issued new regulations (Internal Revenue Code §409A) that suggest privatecompanies should not issue stock options that are “in-the-money” or with an exercise price that is below“fair market value” as defined in IRS Revenue Ruling 59-60. To avoid an additional tax event andpotential penalties, a formal valuation opinion is suggested every 12 months, or more often if there is amaterial change in either the business or the implied market value of the common stock.Issued in December 2004 by the Financial Accounting Standards Board (FASB), ASC 718 (formerly SFAS123R) addresses the accounting for stock-based compensation such as stock options. The statementsupersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and requires that suchtransactions be accounted for using the fair value method. A key driver for that calculation is the fairvalue of the common stock.This report and its conclusions (the “Opinion”) are intended to be used by the Company for the exclusivepurpose of compliance with IRC §409A and as an input for ASC 718 financial reporting purposes.The American Institute for Certified Public Accountants (AICPA), in its Audit and Accounting PracticeAid Series, issued guidelines for the valuation of privately-held company equity securities issued ascompensation. Scalar Analytics has followed these guidelines in its analysis and presentation of itsconclusions.STANDARD OF VALUEScalar Analytics determines fair market value using methodologies that rely on AICPA valuationstandards and IRS requirements. Scalar Analytics derives the value of the Company’s equity from avaluation of the business as a whole and relies on the following definitions provided by regulatoryentities:IRS Revenue Ruling 59-60, Section 2.02: The price at which the property would change hands between awilling buyer and a willing seller when the former is not under any compulsion to buy and the latter isnot under any compulsion to sell, both parties having reasonable knowledge of relevant facts.
  • 8. 2 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tASC 718: The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) ina current transaction between willing parties, that is, other than in a forced or liquidation sale.ASC 820: The price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.PREMISE OF VALUEFor purposes of this engagement, Scalar Analytics has performed the valuation on the “Going Concern”premise of value, which is defined as follows:Going Concern Value: The value of a business enterprise that is expected to continue to operate into thefuture. The intangible elements of Going Concern Value result from factors such as having a trained workforce, an operational plant, and the necessary licenses, systems and procedures in place.1SOURCES OF INFORMATIONThis Opinion is based on information provided and represented by management of the Company. Ourreview and analysis included, but was not necessarily limited to, the following: Discussion with the Company’s management personnel concerning the Company’s assets, capitalstructure, and historical and forecasted operations Analysis of historical and forecasted financial statements, and other financial and operational dataconcerning the Company Review of corporate documents including but not limited to term sheets, articles of incorporation,purchase agreements, and a capitalization summary of common and preferred shares, options, andwarrants Analysis of the Company, its financial and operating history, the nature of its offerings, and itscompetitive position Analysis of the industry in which the Company competes as well as the state of the development ofthe Company’s target markets and the pace of adoption of their chosen technology platforms andproducts Research and analysis concerning comparable public companies and transactions involvingcomparable public and private companies Analysis concerning the current economic conditions and outlook for the U.S. economy as well asapplicable global economic conditions Analysis and estimation of the fair market value of the common equity on a non-marketable,minority basis as of the Valuation Date1AICPA 2007, Statement on Standards for Valuation Services, pg. 45
  • 9. 3 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tAnalysis of Subject Entity and Related Nonfinancial InformationCOMPANY DESCRIPTIONVenture Co. is a Software-as-a-service company. Its software is deployed over the internet throughcommon internet browsers. The Company licenses applications to customers as a service on demand,through a subscription, in a "pay-as-you-go" model, and at no charge for some products. All of thetechnology is hosted in the "cloud" and is accessed over the Internet as a service. Customers chooseVenture Co. because the software is accessible from anywhere with an internet connection, requires nolocal server installation, and updates are seamless and instantaneous for all users. The Company’scustomers operate in a variety of industries, including accounting, collaboration, customer relationshipmanagement, enterprise resource planning, invoicing, human resource management, contentmanagement, and service desk management.MANAGEMENT- Joe Bigsby, Founder and CEOPrior to Venture Co., Mr. Bigsby was the Chief Technology Officer at a Silicon Valley venture-backedcompany. Mr. Bigsby holds a B.S. and an M.S. from prestigious universities.STAGE OF DEVELOPMENTThe AICPA Valuation Practice Aid defines six stages of enterprise development, defined as follows21. Enterprise has no product revenue to date and limited expense history, and typically an incompletemanagement team with an idea, plan, and possibly some initial product development. Typically, seedcapital or first-round financing is provided during this stage by friends and family, angels, or venturecapital firms focusing on early-stage enterprises, and the securities issued to those investors areoccasionally in the form of common stock but are more commonly in the form of preferred stock.:2. Enterprise has no product revenue but substantive expense history, as product development is underway and business challenges are thought to be understood. Typically, a second or third round offinancing occurs during this stage. Typical investors are venture capital firms, which may provideadditional management or board of directors expertise. The typical securities issued to thoseinvestors are in the form of preferred stock.3. Enterprise has made significant progress in product development; key development milestones havebeen met (for example, hiring of a management team); and development is near completion (forexample, alpha and beta testing), but generally there is no product revenue. Typically, later roundsof financing occur during this stage. Typical investors are venture capital firms and strategic businessAnalytics. The typical securities issued to those investors are in the form of preferred stock.2American Institute of Certified Public Accountants 2004, Valuation of Privately-Held-Company Equity Securities Issued asCompensation, pp. 13–14.
  • 10. 4 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n t4. Enterprise has met additional key development milestones (for example, first customer orders, firstrevenue shipments) and has some product revenue, but is still operating at a loss. Typically,mezzanine rounds of financing occur during this stage. Also, it is frequently in this stage thatdiscussions would start with investment banks for an IPO.5. Enterprise has product revenue and has recently achieved breakthrough measures of financialsuccess such as operating profitability or breakeven or positive cash flows. A liquidity event of somesort, such as an IPO or a sale of the enterprise, could occur in this stage. The form of securities issuedis typically all common stock, with any outstanding preferred converting to common upon an IPO(and perhaps also upon other liquidity events).6. Enterprise has an established financial history of profitable operations or generation of positive cashflows. An IPO or sale of the enterprise could also occur during this stage.According to these definitions, Venture Co. is considered to be in the fourth stage of development.RISKSThe Company faces significant risks in achieving its long-term goals. The risks include but are notlimited to:Industry Specific RisksThe industry in which the Company operates is highly competitive and at times rapidly changing.Constant technological advancements necessitate investments in sales and product development. Failureto maintain relationships with key customers and keep up with the “technological curve” could seriouslyimpact the Company’s ability to meet future goals.Company Specific RisksThe Company’s product offerings are relatively new in an industry that is still quickly evolving. Itsability to continue to penetrate the market remains uncertain as potential clients may choose to adoptdifferent products or platforms. In addition, industry standards or government regulations may impactthe Company’s ability to meet market demands. Success will be a factor of investing in the developmentand implementation of sales campaigns, and subsequent adoption by its clients. Additionally, theCompany could face financial pressure associated with obtaining capital given its operating history.Economic RiskThe Company’s performance is subject in part to worldwide economic conditions, including but notnecessarily limited to the following macroeconomic factors:- Consumer spending- Availability of safe, liquid investments that provide reasonable returns- Access to financing in credit and capital markets at reasonable rates- Government spending and sovereign debt levels in the U.S. and internationally
  • 11. 5 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n t- Fluctuations in exchange rates relative to the U.S. dollar- Health and stability of major financial institutionsRecent uncertainty in global credit and equity markets have led to a tightening of business credit andliquidity, a contraction of consumer credit, business failures, higher unemployment, and declines inconsumer confidence and spending in the United States and internationally. If global economic andfinancial market conditions deteriorate or remain weak for an extended period of time, the Company’ssuccess may be adversely impacted.Competitive RiskVenture Co. faces competition from larger, better capitalized companies that could directly compete withthe Company’s products. These competitors may have superior product offerings, technologies,marketing capabilities, pricing, costs of production, or customer service. This, in addition to rapidchanges in technology and consumer preferences, poses significant risks to the Company’s success. IfVenture Co. does not adequately and timely anticipate and respond to competitors, the Company’s costsmay increase or demand for their products may decline significantly.Industry OverviewSoftware as a ServiceDriversA traditional rationale for outsourcing IT systems involves applying economies of scale to applicationoperation, i.e., an outside service provider can offer better, cheaper, more reliable applications. SaaS-based application use has grown dramatically. A Gartner survey in July 2009 found that customers are"somewhat satisfied". Several important changes to the way people work have facilitated this rapidacceptance: Availability of fast, low-cost broadband. Computers have become widespread—most information workers have at least basic computerskills. Computing has become a commodity. In the past, corporate mainframes were jealously guardedas strategic advantages. More recently, applications were viewed as strategic. Today, peopleknow it’s the business processes and the data itself (customer records, workflows, pricinginformation) that matters. Computing and application licenses are cost centers, and as such,they’re suitable for cost reduction and outsourcing. The adoption of SaaS could also driveInternet-scale to become a commodity. Insourcing IT systems requires expensive overhead including salaries, health care, liability, andphysical building space. Applications have tended to standardize. With notable industry-specific exceptions, most peoplespend most of their time using standardized applications. An expense-reporting page, an
  • 12. 6 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tapplicant screening tool, a spreadsheet, or an e-mail system are all sufficiently ubiquitous andwell understood that most users can switch from one system to another easily. This is evidentfrom the number of web-based calendaring, spreadsheet, and e-mail systems that have emergedin recent years. Parametric applications are usable. In older applications, one could often only change aworkflow by modifying the code. In more recent applications, particularly web-based ones,significantly new applications can be created from parameters and macros. This allowsorganizations to create different kinds of business logic on a common application platform. ManySaaS providers allow a wide range of customization within a basic set of functions. A specialized software provider can target global markets. A company that made software forhuman resource management at boutique hotels might once have had a hard time findingenough of a market to sell its applications. But a hosted application can instantly reach the entiremarket, making specialization within a vertical market not only possible, but preferable. This inturn means SaaS providers can often deliver products that meet specific market needs better thantraditional "shrinkwrap" applications. Web systems demonstrate reliability. Despite sporadic outages and slow-downs, most people arewilling to use the public Internet, the Hypertext Transfer Protocol and the TCP/IP stack todeliver business functions to end users. Security is sufficiently well trusted and transparent. With the broad adoption of SSL,organizations have a way of reaching their applications without the complexity and burden ofend-user configurations or VPNs. Enablement technology (tools, libraries, etc,) is available. According to IDC, organizationsdeveloping enablement technology that allow other vendors to quickly build SaaS applicationswill play an important role in driving the adoption of SaaS. Because of SaaS relative infancy,many companies have either built enablement tools or platforms or are in the process ofengineering enablement tools or platforms. A Saugatuck study shows the industry will mostlikely converge to three or four enablers that will act as SaaS Integration Platforms (SIPs). Wide-area network bandwidth has grown drastically, following Moores Law (more than 100%increase each 24 months), and is about to reach slow local networks bandwidths. Added tonetwork quality improvement, this has driven people and companies to trustfully access remotelocations and applications with low latencies and acceptable speeds. SaaS has "democratized" software, allowing small and medium businesses to access functionalityformerly the domain of large enterprises. Many analytical software tools have been released asSaaS applications on a monthly subscription basis. SaaS facilitates data aggregation. Instead of collecting data from multiple data sources withdifferent database schemas, all data for all customers is stored in a single database schema (i.e.,multi-tenant). This simplifies running queries across customers, mining data, and looking fortrends.
  • 13. 7 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n t The rise of third-party SaaS data escrow services has reduced some security concerns by allowingapplication data to be held with an independent third party.Sales ChannelsWith products focused on the mid market, direct selling can become an expensive undertaking. SaaScompanies seek alternatives by selling through value-added resellers (VARs), Managed Service Providers(MSPs), Master Managed Service Providers (MMSPs), and similar alliance Analytics. However, since SaaSis not only a different delivery mechanism, but a different business model and different technology,selling through channels has its own challenges.Pricing ModelsSaaS applications provide the opportunity to implement pricing models that establish and maintainrecurring revenue streams. Most SaaS vendors charge a monthly hosting or subscription fee.Opportunities also exist to charge per transaction, event, or other unit of value. These alternative pricingmodels exist because customers "lease" the software from the vendors and the vendors can view alltransactional activity.User satisfactionGartners 2008 survey of 333 enterprises in the US and UK found a low level of approval from customers,describing overall satisfaction levels as "lukewarm." Respondents who decided against SaaS cited highservice cost, integration difficulty, and technical requirements. A recent report from Forrester, “The ROIof Software-As-A-Service,” examined a range of companies that chose SaaS solutions and found that SaaSdoes result in long-term value. Companies interviewed for the report cited several reasons for their ROIof SaaS: Rapid deployment Increased user adoption Reduced support needs Lower implementation and upgrade costs.Representative SaaS Companies Performance
  • 14. 8 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tEconomic OverviewHousing Rebounds, but Forward-Looking Indicators Cause ConcernData released since the August Federal Open Market Committee (FOMC) meeting indicate that economicgrowth may have firmed, but at the same time, forward-looking indicators may portend stalling growth.Real gross domestic product (GDP) grew at a 1.7 percent annual rate in second quarter 2012.Contributors to recent growth have been improvementsin housing and slight improvements in the labor market.Although manufacturing production also had picked up,more timely survey data had foreshadowed a decline fora few months. The August manufacturing data exhibitedthis drop. Inflationary pressures remain subdued.Net Exports Drive Upward Revision of GDP GrowthSecond-quarter real GDP growth was revised up to 1.7percent from the advanced reading of 1.5 percent (Chart1). The greatest contribution came from personalconsumption expenditures (PCE), coming in at 1.2percent, supported in part by progress in the housingmarket. Growth in business nonresidential fixedinvestment has slowed over the past four quarters, adding0.4 percent, while an increase in residential investmentwas offset by a negative contribution from inventories.Net exports contributed 0.3 percent to GDP growth, anupward revision of 0.6 percent from the advancedreading. Government continues to be a drag on the economy, taking 0.2 percent off real GDP growth inthe second quarter; yet, this drag has lessened. The upward revision of second-quarter GDP growth canbe attributed primarily to the large, positive revision of the contribution of net exports; however, thelargest contributor to overall growth, PCE, was largely driven by the noteworthy improvement in thehousing market.
  • 15. 9 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tHouse Prices Showing Signs of an UptakePositive news continues to come out of the housing sector. House prices seem to have bottomed out,posting broad-based gains recently. Major house priceindexes flattened at the beginning of 2012 and thenincreased over the summer, exhibiting year-over-yeargrowth in the most recent readings (Chart 2).Chart 3A displays the peak-to-trough house price declinefor each state during the housing bust (note that NorthDakota did not experience a house price decline). Thefive colors denote quintiles, with red states suffering thelargest declines and green states being only mildlyaffected. The declines were concentrated on the coasts,especially in the Southwest and Florida. Many of the redstates are now experiencing the greatest house price gainsas their housing markets recover. Chart 3B shows theincrease in house prices since prices bottomed out in eachstate through the June data release. Notably, house pricesin Rhode Island and Delaware have yet to bottom out,and North Dakota’s large increase follows no decline inhouse prices. Increases in house prices will improve the balance sheets of households, leading to anincrease in spending and a declining unemployment rate. A map of recent changes in the unemploymentrate would reveal a correlation between the improvements in unemployment rates and recovery in houseprices by state.Slight Improvement in Nonfarm PayrollsAfter a very weak second quarter (average monthlyincrease of 67,000 jobs) and a positive surprise from theJuly employment report (141,000 jobs), total nonfarmpayrolls increased by only 96,000 jobs in August (Chart4). In private services the biggest employment gains werein leisure and hospitality (34,000 jobs), professional andbusiness services (28,000 jobs), and education and healthservices (22,000 jobs), which combined to account forthree quarters of all gains in service-producingemployment. The notable decline in August manufacturing employment in conjunction with recentsurvey data from the Institute for Supply Management (ISM) were leading indicators of the decline inmanufacturing production observed in August.Manufacturing Production Turning Down
  • 16. 10 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tAfter rising robustly in early 2012, manufacturing production slowed considerably (Chart 5) just as thecontribution of business nonresidential fixed investment to real GDP growth continued to trend down.The positive July reading temporarily alleviated concernabout an immediate, more substantive slowdown;however, a number of red flags had already been raised.Weakness in both the August manufacturing employmentdata and the ISM manufacturing index were causes forconcern; the ISM manufacturing index registered a sub-50reading for three straight months, indicating below-trendgrowth. The large drop in manufacturing output that wasfeared materialized in the August report.Prices Decelerating SlightlyPrice pressures have been subdued in July and August. Core prices have been very stable, though therehas been slight deceleration recently. Core PCE measures are below the FOMC’s 2 percent target, whilethe core consumer price index (CPI) inflation reading dipped below this target for the first time in nearlya year (Chart 6). Headline inflation has receded, but some increases in food prices will likely manifest inslightly higher headline inflation in 2013. Import pricescontinue to fall on a year-over-year basis, possibly leadingthe deceleration in core inflation. Inflation expectationsremain well-anchored.Economic growth may have firmed from a modest startingpace below 2 percent. The trade balance improvedsubstantially, contributing positively to the second-quarterGDP reading. The improvement in the housing market hasalso been a key driver of growth and looks to continue tobe so. The labor market is still operating with high levels of unemployment and underemployment.Nonfarm payrolls have picked up from the slow pace of the second quarter, though August’s employmentnumbers were disappointing following July’s report. The outlook for business investment has softened asISM readings and manufacturing production have weakened. Inflationary pressures remain subduedamid disinflationary risks as core price indexes decelerate. Looking ahead, the central tendency forecastfor U.S. real GDP growth for 2012 is between 1.7 and 2.0 percent; the forecast for 2013 improved tobetween 2.5 and 3.0 percent, according to the FOMC’s survey of economic projections. 33J.B. Cooke, National Economic Update: Housing Rebounds, but Forward-Looking Indicators CauseConcern, Federal Reserve Bank of Dallas, 9/17/2012, http://www.dallasfed.org/research/update-us/2012/1206.cfm
  • 17. 11 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tFinancial Statement AnalysisScalar Analytics obtained the following financial information from Venture Co. in connection withperforming this analysis as of the Valuation Date: Historical financial statements for the relevant time period Projected financial statements representing Management’s estimates regarding the Company’soperations Identification and valuation of the company’s separate revenue streams Capitalization table and legal information related to the Company’s capital structureSee Exhibits G, H, and I for the Company historical and projected income statement, balance sheet, andcash flow statement. Based on the Company’s projections, the forecast included revenue and majorexpense categories along with selected balance sheet and cash flow information.Valuation Approaches and Methods ConsideredTo determine the Company’s enterprise value, three traditional valuation methods were considered: theAsset Approach, the Market Approach, and the Income Approach.ASSET APPROACHThe Asset Approach establishes value based on the cost of reproducing or replacing the property, lessdepreciation from physical deterioration and function and economic obsolescence, if present andmeasurable. This approach can be used to provide a reliable indication of value when applied to specificassets, such as land improvements, special-purpose buildings, special structures, systems, specialmachinery and equipment, and certain intangible assets.MARKET APPROACHThe Market Approach is based on the assumption that the value of an asset (including a company) isequal to the value of a substitute asset with the same characteristics. Therefore, the value of an asset canbe inferred by finding similar assets that have been sold in recent transactions.One methodology under the Market Approach is the Recent Securities Transaction approach. Thisapproach considers the Company’s implied equity value based on recent transactions of the subjectcompany’s securities. The applicability of this methodology depends on the circumstances surroundingthe transaction; specifically, whether or not it meets the criteria outlined in the definition of Fair MarketValue.The Comparable Public Company Method compares the subject company with select publicly-tradedcompanies. Valuation multiples are calculated from selected companies to provide an indication of howmuch a current investor in the marketplace would be willing to pay for a company with characteristics
  • 18. 12 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tsimilar (e.g. similar business, size and other operating characteristics) to the subject company. Thesevaluation multiples are evaluated and adjusted based on the strengths and weaknesses of the subjectcompany relative to the selected guideline companies. Finally, the multiples are applied to the subjectcompany’s operating data to arrive at an indication of fair value. The Comparable Company Method ismost appropriate when public companies that are reasonably similar to the subject company can befound.Another methodology of the Market Approach is the Comparable Transaction Method. This method relieson data of mergers and acquisitions that have occurred in the subject company’s industry or relatedindustries. As in the Comparable Company Method, valuation multiples are developed and applied to thesubject company’s operating data to estimate fair value. Again, the Comparable Transaction Method canbe used if there are recent transactions involving companies similar to the subject company. Both theComparable Companies Method and the Comparable Transactions Method were considered in thisanalysis.Lastly, the Market Approach also includes the use of industry-specific multiples. Companies in certainindustries are often valued in terms of customers, users, recurring monthly revenue, and a number ofother attributes. Where reliable data is available, it may be appropriate to conduct a valuation byapplying these industry-specific multiples to the appropriate attributes of the subject company.INCOME APPROACHThe income approach seeks to measure the future benefits that can be quantified in monetary terms. Thismethod typically involves two general steps. The first is making a projection of the total cash flowsexpected to accrue to an investor in the asset. Examples include cash flow realizable from an interest in abusiness, rental savings from a favorable contract, or a royalty savings from ownership of a patent. Thesecond step involves discounting these cash flows to present value at an appropriate discount rate thatconsiders the degree of risk associated with the realization of the projected monetary benefits.The discounted cash flow method (“DCF”) is a form of the income approach often used in the valuationof entire businesses, major segments of a business or intangible property. The value of the investedcapital is the sum of the present value of projected debt-free net income throughout the discrete andterminal periods.Valuation Approaches and Methods UsedASSET APPROACH (NOT APPLICABLE)Generally the asset approach is considered applicable to start-ups in stages 1 and 2 (as definedpreviously). The following circumstances typically apply to these companies:
  • 19. 13 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n t There is limited (or no) basis for using the income or market approaches; i.e., there are nocomparable market transactions, and the enterprise has virtually no financial history from which toderive forecasts of future results. The enterprise has been issued patents (or patents are pending), but has not yet developed a product. A relatively small amount of cash has been invested.Since none of the aforementioned scenarios apply to Venture Co., the Asset Approach was not used indetermining the ultimate conclusion of value.COST APPROACHInvested Capital (Not Applicable)This approach may establish value based on the cost of reproducing or replacing the property, lessdepreciation from physical deterioration and function and economic obsolescence, if present andmeasurable. This approach can be used to provide a reliable indication of value when applied to specificassets, such as land improvements, special-purpose buildings, special structures, systems, specialmachinery and equipment, and certain intangible assets.In an analogous logic, in the early stages of a company development, when revenue generation andrelated operations are still not significant or inexistent, capital invested can also serve as an indication ofvalue. The assumption and logic implies that to build a similar company in the same stage ofdevelopment, the capital needed to do so would be at least equal to the amount invested in the company,which is assumed serves to fund costs incurred to date to build, research and/or develop the companyofferings, and achieve the current structure of the subject company.In the case of the Company, we considered the capital invested to date as representative of this measure.Consequently, a value of $22,182,037 was referenced, but not relied upon, in the calculation of theMarket Value of Invested Capital (MVIC) outlined later in this report.MARKET APPROACHRecent Securities Transactions (Applicable)Per AICPA valuation guidelines, recent securities transactions should be considered as a relevant inputfor computing the company’s valuation. When the company sold preferred stock to investors, there wasan implied valuation of the company upon which the securities were priced.To calculate the total equity value implied from the recent equity sale, Scalar Analytics uses theBacksolve method, which utilizes the Option Pricing Method framework to calculate an implied valuebased on the recent transaction. The Backsolve is superior to a simple pre- or post-money calculationbecause it takes into account the economic rights of the recently issued security in relation to the rightsof other equity holders. Debt is then added to the resulting value to calculate the Market Value ofInvested Capital (“MVIC”).
  • 20. 14 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tUsing this approach, the Company’s MVIC, on a marketable basis, was estimated at $42.93 million (seeExhibit B: Recent Securities Transaction Backsolve).Comparable Public Companies (Applicable)In the search for appropriate comparable companies, public companies were screened based on businessmodel, product offerings, industry of operation and the portion of revenues provided through relevantbusiness segments. Based on these criteria, the following five companies were selected as appropriatecomparable companies (See Exhibit D for public company descriptions):- salesforce.com, inc- Concur Technologies, Inc.- Kenexa Corp.- LogMeIn, Inc.- Constant Contact, Inc.Using historical and projected financial data for each company, trading multiples were calculated foreach comparable company. We determined the enterprise value to last twelve months’ (LTM) revenue,LTM EBITDA, next twelve months’ (NTM) revenue, and NTM EBITDA trading multiples to be mostapplicable. Applying the relevant multiples to the Company’s respective financial metrics resulted in thefollowing range of value:Averaging the relevant data points and adding the cash balance yielded an implied MVIC of $49.98million (see Exhibit C for detailed analysis).Comparable Transactions (Applicable)Using information available from the Scalar Analytics, CapIQ, and Bloomberg databases, a list ofcomparable transactions was compiled to incorporate the Comparable Transactions Approach.Transactions were screened by identifying acquired companies that operate in Venture Co.s industry,and companies that have similar business models. The list was refined by separating it into a single listImplied Enterprise ValueImplied Equity Value (Backsolve) $41,182,012Plus: Debt $1,750,000Market Value of Invested Capital $42,932,012In thousands of dollars (000) LTM Revenue LTM EBITDA NTM Revenue NTM EBITDAVenture Co. $6,812.0 ($6,337.8) $14,380.7 ($3,166.6)Mean Multiple 5.0x 22.1x 4.0x 19.2xImplied Enterprise Value $33,809.2 N/A $57,270.2 N/AAverage Enterprise Value $45,539.7Plus Cash $4,441.9Market Value of Invested Capital $49,981.6
  • 21. 15 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tcontaining target companies that most directly compete with Venture Co. and removing targetcompanies with noticeable differences in business model (see Exhibit F for target company descriptions).Based on available financial information regarding these transactions and the multiples of impliedenterprise value over LTM and NTM operating metrics, we calculated the following range of value:Averaging the relevant data points and adding the cash balance yielded an implied MVIC of $55.09million (see Exhibit E for comparable transaction analysis).INCOME APPROACHDiscounted Cash Flow (Applicable)Venture Co.smanagement provided historical financial statements and projections (found in Exhibit G,H, and I), which we used to perform a discounted cash flow analysis. This method involved modeling thefirm’s operations over the specified time period, and then adding the present value of the discrete periodfree cash flows to the discounted value of the free cash flows in the terminal year.The estimated average market value of the company in the terminal year was calculated using the exitmultiple method. This method uses projected revenue and EBITDA in the terminal year, and thenapplies the appropriate multiplies (from comparable transactions) to each metric. The resulting valuesare averaged to determine the terminal value. The terminal value is then discounted to the present bythe calculated discount rate (WACC for unlevered free cash flows or cost of equity for levered free cashflows). Based on the discounted cash flow analysis, we calculated an MVIC of $44.60 million. Details ofthis analysis can be found in the DCF Valuation Summary contained in Exhibits J & K.WACC CalculationThe weighted average cost of capital (“WACC”) is the rate of return that reflects the risk of aninvestment. The higher the risk, the higher the return expected by investors. The WACC is developedusing the capital asset pricing model (“CAPM”), the long term weight of equity and debt in the financialIn thousands of dollars (000) LTM Revenue LTM EBITDA NTM Revenue NTM EBITDAVenture Co. $6,812.0 ($6,337.8) $14,380.7 ($3,166.6)Mean Multiple 5.5x 32.8x 4.4x 28.4xImplied Enterprise Value $37,604.8 N/A $63,699.7 N/AAverage Enterprise Value $50,652.2Plus Cash $4,441.9Market Value of Invested Capital $55,094.2WACC 51.2%NPV of FCFs ($2,282.0)PV of Terminal Value $46,888.5Enterprise Value $44,606.5Plus: Non-Operating Cash $0.0Market Value of Invested Capital $44,606.5
  • 22. 16 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tstructure of companies in the industry, and the estimated cost of debt. CAPM was utilized to develop theCompany’s cost of equity. The CAPM formula is defined as follows:Re = Rf + β*(Rm) + SP + CPWhere:Re = Return on equity Rf = Risk-free rateβ = Beta (unlevered) Rm= Market risk premiumSP = Size premium CP = Company specific risk premiumWe used the following inputs for the CAPM:Rf =2.42% β = 0.96Rm = 5.02% SP = 6.00%CP = 39.0%The Company’s cost of equity was estimated at 52.2%.Using cost of debt and debt/equity informationfrom publicly traded comparables, the WACC for Venture Co. was calculated at 51.21%. For additionaldetails on the WACC calculation, see Exhibit K.Weighted Average ValueAfter considering all valuation methods under each approach, the relevant valuation inputs wereweighted appropriately to arrive at a weighted average equity value as follows:Allocation MethodsThe AICPA guidelines allow for three methods of allocating enterprise value to differing security holdersin the capitalization schedule: the Current Value Method (“CVM”), the Probability Weighted ExpectedReturn Method (“PWERM”), and the Option Pricing Method (“OPM”). Each of these allocation methodswere considered in estimating the fair market value of the Company’s common stock. The OptionFair Market Value of Venture Co. as of September 30, 2012 Market Value of Method WeightedIn actual dollars Invested Capital Weighting ValueAdj. Book Value of Assets (Cost) $5,914,647 0.0% $0Invested Capital (Cost) $22,182,037 0.0% $0Recent Securities Transaction Backsolve (Market) $42,932,012 25.0% $10,733,003Public Comps Valuation (Market) $49,981,604 25.0% $12,495,401Acquisition Comps Valuation (Market) $55,094,153 25.0% $13,773,538Discounted Cash Flow Valuation (Income) $44,606,522 25.0% $11,151,631Weighted Market Value of Invested Capital $48,153,573Less Debt ($1,750,000)Weighted Equity Value $46,403,573
  • 23. 17 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tPricing Method was considered appropriate given the Company’s anticipated exit date and uncertaintyregarding future returns.OPTION PRICING METHODScalar Analytics estimated the fair value of Venture Co.s common equity using the OPM (see Exhibit M:Break Point Analysis and Exhibit N: Option Pricing Method). The OPM treats common stock andpreferred stock as call options on the value of the enterprise, with exercise prices based on theliquidation preferences of preferred stockholders. Under this method, the common stock has value only ifthe funds available for distribution to shareholders exceed the value of the liquidation preferences at thetime of a liquidity event (for example, merger, or sale), assuming the enterprise has funds available tomake a liquidation preference meaningful and collectible by the shareholders.The common stock is modeled as a call option that gives its owner the right but not the obligation to buythe underlying enterprise value at a predetermined or exercise price. In the model, the exercise price isbased on a comparison with the enterprise value rather than, as in the case of a “regular” call option, acomparison with a per-share stock price. Thus, common stock is considered to be a call option with aclaim on the enterprise at an exercise price equal to the remaining value immediately after the preferredstock is liquidated. The OPM has commonly used the Black-Scholes model to price the call option.The OPM considers the various terms of the stockholder agreements, including the level of seniorityamong the securities, dividend policy, conversion ratios, and cash allocations, upon liquidation of theenterprise. In addition, the method implicitly considers the effect of liquidation preferences as of thefuture liquidation date, not as of the valuation date. 44Valuation of Privately-Held-Company Equity Securities Issued as Compensation, American Institute of Certified PublicAccountants, 2004, pg. 61.$0$50$100$150$200$250$300Returns(millions)EnterpriseValue (millions)Returns By Share Class (Breakpoints)LT DebtSeries CSeries BSeries ACommonAllocatedA WarrantsCommonWarrantsUnallocated$0$50$100$150$200$250$300$350$400$450$500EnterpriseValue(millions)EnterpriseValue (millions)Returns By Share Class (Linear)UnallocatedCommonWarrantsA WarrantsAllocatedCommonSeries ASeries BSeries CLT Debt
  • 24. 18 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tBased on the average of the five year volatility calculations from the public comparable companies, avolatility number of 54% was selected for the option pricing calculation. Based on the breakpoints andcapital structure as detailed in Exhibit L& M, the fair market value of common stock is estimated at$0.484 per share on a non-marketable basis.Valuation AdjustmentsDISCOUNT FOR LACK OF MARKETABILITY (“DLOM”)A number of restricted stock and pre-IPO studies have been referenced in valuation court cases over theyears when discussing the appropriate discount for lack of marketability. Included below is a summaryof the historical restricted stock studies:Restricted Stock Study Years Covered Average DiscountInstitutional Investor Study 1966 – 1969 25.8%Gelman 1980 – 1970 33.0%Trout 1968 – 1972 33.5%Moroney Not Specified 35.6%Maher 1969 – 1973 35.4%Standard Research Consultants 1978 – 1982 45.0%Willamette Management Associates 1981 – 1984 31.2%Silber 1981 – 1988 33.8%Management Planning 1980 – 1996 27.1%These studies are limited in that many were restricted to a small sample of transactions and most providelittle or no detail regarding how the marketability discount varies around the average.5More recently,FMV Opinions, Inc. (“FMV”) conducted a study of 230 transactions from 1980 through April 1997. Theoverall average discount for all 230 transactions was 20.1% with a standard deviation of 17.2%.6Thediscounts were shown to vary significantly from -10% to 70% discounts. The practice of usingbenchmark averages is inappropriate and has been frowned upon by tax courts. According to the resultsof this study, “Smaller, less profitable entities, and those with higher degree of balance sheet risk, willtend to have higher discounts.”7FMV divided the transaction sample into quintiles and computed themedian total assets, market-to-book ratio, and price per share as shown below:5Robak& Hall, “Bringing Sanity to Marketability Discounts: A New Data Source”, page 2.6Id., page 6.7Id., page 8.
  • 25. 19 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tQuintile 1 2 3 4 5Percentage Discount 2.9% 12.6% 21.1% 31.2% 43.7%Market-to-Book Ratio 3.97 5.05 4.88 8.12 7.92Total Assets ($000s) 43,585 31,404 16,305 10,725 5,994Price per Share $10.19 $8.50 $6.00 $3.42 $3.75The FMV study also found that, “Highly profitable firms tend to have lower discounts than the average.”The top decile, arranged by profitability, has a median discount of 11.0 percent.Guidance from the Securities and Exchange Commission (“SEC”) and the AICPA suggests that a morequantitative approach should be used to estimate an appropriate DLOM. Scalar references twoapproaches: the Put Option Analysis, and the Asian Put Option or Finnerty model.Put Option AnalysisThe logic of the put option approach rests on the notion that the holder of a non-marketable security caneffectively purchase liquidity by purchasing the option to sell. Hence, the non-marketable value of asecurity is its fair market value, less the value of the option to sell. The put option calculation relies onthe Black-Scholes option pricing model, which utilizes volatility from publicly traded comparablecompanies, an appropriate risk-free rate, and an estimated time to maturity (or liquidity).Asian Put Option (Finnerty)John D. Finnerty conducted an option-pricing study88John D. Finnerty, “The Impact of Transfer Restrictions on Stock Prices.” Analysis Group/Economics, October 2002.that “tests the relative importance of transferrestrictions on the one hand and information and equity ownership concentration effects on the other inexplaining private placement discounts.” The model assumes that investors do not have perfect markettiming ability. Instead, the DLOM is modeled as the value of an average strike put option. In addition toanalyzing stock-options, Finnerty analyzed 101 private placements of restricted stock that occurredbetween January 1, 1997, and February 3, 1997. The Finnerty private placement study concluded pricediscounts of 20.13 percent and 18.41 percent for the day prior to the day prior to the private placementand for 10 days prior to the private placement, respectively.Put Option AnalysisBasic put option approach for estimating the DLOM. Current Equity Value (Price) [s] 100%Exercise [k] 100%Riskfree Rate [r] 0.31%Maturity (in years) [t] 3.0Calculations Volatility [σ] 54.50%(LN(s/k)+(r+(σ^2)/2)*t)/(σ*SQRT(t)) d1 0.482d1 - σ*SQRT(t) d2 (0.462)(k*EXP(-s*t))*NORMSDIST(-d2)-s*NORMSDIST(-d1) Discount for Lack of Marketability 35.7%
  • 26. 20 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tThe usefulness of the Finnerty model may be limited by two main factors. First, an important assumptionof the model is a liquidity event. The reality for an owner of private company stock is that he or she maynever experience a liquidity event. This assumption would warrant a price discount greater than what isindicated by the option pricing studies. Second, an owner of private company stock does not have theability to hedge his or her investment in the options market. Stock options on small, thinly tradedcompanies rarely exist, and the market for private company stock or options on that stock simply doesnot exist.If the implied DLOM from a particular option pricing model is 30 percent (when the strategy is actuallyavailable to investors), then the implied DLOM for shares of private company stock would be expected tobe higher (when the strategy does not actually exist).9SMALL COMPANY RISK PREMIUMSince most of the comparable public companies are large or mid cap stocks, we apply an additional riskpremium to the cost of equity calculated from the CAPM. This adjustment reflects the additionalpremium investors require for small cap public stocks. The discount ranges from between 0% – 6%depending on the size (in revenue) of the company.COMPANY SPECIFIC RISK PREMIUMThe CAPM relies on assumptions about the long-term, publicly traded stock markets. To capture the riskinvestors require for investing in smaller, less profitable, and less mature companies, an additionalcompany specific risk premium is applied to the cost of equity. The company specific risk premiumreflects the additional risk associated with the Company revenue relative to market, profitability, and itsassets base.9Travis R. Lance, “The Use of Theoretical Models to Estimate the Discount for Lack of Marketability.” Willamette ManagementAssociates, 2007.Asian Put Option (Finnerty)The Asian Put Option was developed by John Finnerty. See "Measuring the Impact of Length of Holding Period Restriction, ( T ), In Years [1] [2] 2.0Marketability Restrictions on Stock Prices" by John Finnerty, PricewaterhouseCoopers Volatility per year ( s ) [3] 54.50%(1997) for additional information Risk-free rate (semi-annual bond-equivalent yield) 0.23%Risk-Free Rate, continuously compounded ( r ) [4] 0.23%Notes Dividend Yield (q) expressed as a % of stock price 0.0%[1] Based on the time period until liquidity will be attained.[2] The Finnerty model caps the length of the holding period at 2 years. Intermediate calculations[3] Based on the Companys projected volatility. (s^2)T 0.5940[4] Based on bond math: converts risk-free rate from discrete to continuous compounding. v [5] 0.4228[5] v = SQRT{(s^2)T + ln[2*(exp((s^2)T) - (s^2)T - 1)] - 2 ln[exp((s^2)T) - 1]}. A = [(r-q)/v]*sqrt(T) + 1/2 v * sqrt(T) 0.3066[6] d = e(r-q)TN(A) - N(B) B = [(r-q)/v]*sqrt(T) - 1/2 v * sqrt(T) (0.2912)Discount for Lack of Marketability, d, as a % of stock price [6] 23.8%Selected Discount for Lack of Marketability 35.7%
  • 27. 21 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tScalar Partners - Company Specific Discount ScaleRevenues (in 000s) $50,000.0 $30,000.0 $20,000.0 $10,000.0 $5,000.0Profitability 5.0% 0.0% (5.0%) (10.0%) (15.0%)Total Assets (in 000s) $50,000.0 $30,000.0 $20,000.0 $10,000.0 $5,000.0Discount Penalties if Less Than…Revenues 3.0% 3.0% 3.0% 3.0% 3.0%Net Income 3.0% 3.0% 3.0% 3.0% 3.0%Total Assets 3.0% 3.0% 3.0% 3.0% 3.0%Company Specific AdjustmentsRevenues (in 000s) $6,812.0 3.0% 3.0% 3.0% 3.0% 0.0%Profitability (101.3%) 3.0% 3.0% 3.0% 3.0% 3.0%Total Assets (in 000s) $5,914.6 3.0% 3.0% 3.0% 3.0% 0.0%2012 Company Specific Discount to Cost of Equity 39.0%
  • 28. 22 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tValuation Analyst RepresentationThe undersigned hereby certify that to the best of our knowledge and belief:Compensation for Scalar Analytics is not contingent on any action or event resulting from the analyses,opinions, or conclusions in, or the use of, this report. The reported analysis, opinions, and conclusionsare limited only by the reported terms and conditions, and represent the unbiased professional analyses,opinions, and conclusions of Scalar Analytics. The analyses, opinions and conclusions were developed,and this report has been prepared, in accordance with the American Institute of Certified PublicAccountants Statement on Standards for Valuation Services.___________________________________________ Date: November 16, 2012Scalar AnalyticsPrincipal AppraiserTodd Miller, AVAContributing AppraisersLuis Coronel
  • 29. 23 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tConclusion of ValuePURPOSE OF REPORTScalar Analytics has performed a valuation engagement, as that term is defined in the Statement onStandards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants, ofVenture Co. as of September 30, 2012. This valuation was performed solely for the purpose stated in thisreport. The resulting estimate of value should not be used for any other purpose or by any other partyfor any purpose. This valuation engagement was conducted in accordance with the SSVS. The estimate ofvalue that results from a valuation engagement is expressed as a conclusion of value.ASSUMPTIONS AND LIMITING CONDITIONSScope of AnalysisThe appraisal of any financial instrument or business is a matter of informed judgment. Theaccompanying appraisal has been prepared on the basis of information and assumptions set forth in thereport, its appendices, our underlying work papers, and the limiting conditions and assumptions setforth.Use of ReportThis report and the conclusion of value arrived at herein are for the exclusive use of our client for thesole and specific purposes as noted herein. They may not be used for any other purpose or by any otherparty for any purpose. Furthermore the report and conclusion of value are not intended by the authorand should not be construed by the reader to be investment advice in any manner whatsoever. Theconclusion of value represents the considered opinion of Scalar Analytics, based on informationfurnished to them by Venture Co. and other sources.DistributionNeither all nor any part of the contents of this report (especially the conclusion of value, the identity ofany valuation specialist, or the firm with which such valuation specialists are connected or any referenceto any of their professional designations) should be disseminated to the public through advertisingmedia, public relations, news media, sales media, mail, direct transmittal, or any other means ofcommunication without the prior written consent and approval of Scalar Analytics.Going Concern Assumption, No Undisclosed ContingenciesScalar Analytics’ analysis: (a) is based on the past and present financial condition of the Company and itsassets as of the Valuation Date; (b) assumes that as of the Valuation Date the Company and its assets willcontinue to operate as configured as a going concern; (c) assumes that the current level of managementexpertise and effectiveness would continue to be maintained and that the character and integrity of theenterprise through any sale, reorganization, exchange, or diminution of the owners’ participation wouldnot be materially or significantly changed; and (d) assumes that the Company had no undisclosed real orcontingent assets or liabilities, no unusual obligations or substantial commitments, other than in the
  • 30. 24 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tordinary course of business, nor had any litigation pending or threatened that would have a materialeffect on our analysis.Lack of Verification of Information ProvidedFinancial statements and other related information provided by the Company or its representatives, inthe course of this engagement, have been accepted without any verification as fully and correctlyreflecting the enterprise’s business conditions and operating results for the respective periods, except asspecifically noted herein. Scalar Analytics has not audited, reviewed, or compiled the financialinformation provided to us and, accordingly, we express no audit opinion or any other form of assuranceon this information. Public information and industry and statistical information have been obtained fromsources we believe to be reliable. However, we make no representation as to the accuracy orcompleteness of such information and have performed no procedures to corroborate the information.Reliance on Forecasted DataConcerning forecasted financial and operational data, Scalar Analytics does not express an opinion orany other form of assurance as to the reasonableness of the underlying assumptions. If prospectivefinancial information approved by management has been used in our work, we have not examined orcompiled the prospective financial information and therefore, do not express an audit opinion or anyother form of assurance on the prospective financial information or the related assumptions. Events andcircumstances frequently do not occur as expected, and there will usually be differences betweenprospective financial information and actual results, and those differences may be material.Subsequent EventsThe terms of Scalar Analytics’ engagement are such that Scalar Analytics has no obligation to update thisreport or to revise the valuation because of events and transactions occurring subsequent to the date ofthe valuation unless Scalar Analytics is engaged to provide valuations in the future.Legal MattersScalar Analytics assumes no responsibility for legal matters including interpretations of either the law orcontracts. Scalar Analytics has made no investigation of legal title and has assumed that all owners’claims to property are valid. Scalar Analytics has given no consideration to liens or encumbrances exceptas specifically stated in financial statements provided to us. Scalar Analytics has assumed that allrequired licenses, permits, etc. are in full force and effect. Scalar Analytics assumes that all applicablefederal, state, local zoning, environmental and similar laws and regulations have and continue to becomplied with by the Company. Scalar Analytics assumes no responsibility for the acceptability of thevaluation approaches used in our report as legal evidence in any particular court or jurisdiction. Thesuitability of Scalar Analytics’ report and opinion for any legal forum is a matter for the Company andthe Company’s legal advisor to determine.TestimonyFuture services regarding the subject matter of this report, including, but not limited to testimony or
  • 31. 25 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tattendance in court, shall not be required of Scalar Analytics unless previous arrangements have beenmade in writing.CONCLUSIONBased on our analysis, as described in this valuation report, the calculated value of Venture Co.scommon stock on a non-marketable basis as of September 30, 2012 is $0.484 per share. Thisconclusion is subject to the assumptions and limiting conditions as outlined in this report and to theValuation Analyst’s Representation.
  • 32. 26 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tValuation Analyst QualificationsTodd Miller, AVA– AssociateTodd Miller is an Associate at Scalar Analytics and is responsible for managing the firms valuation andtransaction advisory engagements. Todd has performed dozens of valuations for private and venture-backed companies in all stages of development. He has interacted with the transaction advisory teams ofnumerous Big Four and regional accounting firms across the country in performing valuations, passingthe scrutiny of strict legal and audit standards. Todd has also helped perform solvency opinions, ESOPvaluations, and advised on $100M+ mergers. Prior to joining Scalar Analytics, Todd was an associatewith Horizon Analytics, a secondary private equity advisory firm. Additionally, Todd worked as ananalyst for Granada Advisors providing consulting and financial modeling services to small and mid-market companies in the Rocky Mountain region. Todd also worked as an intern with Peterson Venturesperforming industry analysis where he developed a strategic growth plan for one of their portfoliocompanies. Todd graduated from Brigham Young University’s Marriott School of Management with adegree in finance. He is also an Accredited Valuation Analyst and a member of the National Associationof Certificed Valuators and Analysts.Luis Coronel– Vice PresidentLuis is a Vice President at Scalar Analytics and is responsible for managing the firms valuation andtransaction advisory engagements. Prior to joining Scalar Analytics, Luis was an analyst at vSpringCapital, a Salt Lake City-based venture capital firm with over $400 million under management.Previously, Luis held several managerial and financial positions with firms in Argentina includingcorporate HR manager for Productora Alimentaria S.A., general manager for La California, a real estatedevelopment company, and as a financial analyst for Edwards International Services S.A. Luis is aNational Public Accountant (CPN) in Argentina and graduated with an MBA from Brigham YoungUniversity with an emphasis in finance.
  • 33. 27 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibitsExhibit A: Valuation SummaryFair Market Value of Venture Co. as of September 30, 2012 Market Value of Method WeightedIn actual dollars Invested Capital Weighting ValueAdj. Book Value of Assets (Cost) $5,914,647 0.0% $0Invested Capital (Cost) $22,182,037 0.0% $0Recent Securities Transaction Backsolve (Market) $42,932,012 25.0% $10,733,003Public Comps Valuation (Market) $49,981,604 25.0% $12,495,401Acquisition Comps Valuation (Market) $55,094,153 25.0% $13,773,538Discounted Cash Flow Valuation (Income) $44,606,522 25.0% $11,151,631Weighted Market Value of Invested Capital $48,153,573Less Debt ($1,750,000)Weighted Equity Value $46,403,573Equity Allocation Method Option Pricing MethodValue per Common Share (marketable, minority basis) $0.753Discount for Lack of Marketability 35.7%Value per Common Share (non-marketable, minority basis) $0.484
  • 34. 28 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit B: Recent Securities Transaction BacksolveOption Value Analysis Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 7 Option 8 Option 9 Option 10Definition: Before this breakpoint… Series CliquidationpreferenceSeries B & AliquidationpreferenceCommonparticipatesAllocatedoptions exerciseSeries Aconverts tocommonCommonWarrantsexerciseUnallocatedoptionsparticipate invalueSeries Bconverts tocommonSeries C reaches3.0xparticipationcapSeries Cconverts intoCommon stockBreak Points $0 $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 InfinityCurrent Equity Value (Price) $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012 $41,182,012Exercise $0 $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 InfinityRiskfree Rate 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31%Maturity (in years) 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0Volatility 54% 54% 54% 54% 54% 54% 54% 54% 54% 54% 54%d1 28.815 1.207 1.137 0.977 0.898 0.869 0.528 0.148 (1.627) (1.981) 0.000d2 27.871 0.263 0.193 0.033 (0.046) (0.075) (0.416) (0.796) (2.571) (2.925) 0.000Call Option Value: $41,182,012 $24,074,139 $23,249,329 $21,291,816 $20,316,134 $19,944,203 $15,646,424 $11,102,887 $620,840 $261,072 $0Incremental Option Value $17,107,873 $824,810 $1,957,513 $975,682 $371,932 $4,297,779 $4,543,537 $10,482,047 $359,768 $261,072Option Value of Security Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 7 Option 8 Option 9 Option 10Series C $17,107,873 $0 $447,939 $185,744 $61,154 $708,116 $689,152 $1,532,604 $0 $38,627Series B $0 $644,422 $0 $0 $0 $0 $0 $328,365 $13,052 $8,070Series A $0 $180,388 $0 $0 $36,680 $204,534 $199,056 $448,685 $18,045 $11,157Common $0 $0 $1,509,575 $625,966 $206,090 $2,386,386 $2,322,478 $5,235,016 $210,538 $130,175Allocated $0 $0 $0 $163,972 $53,986 $625,115 $608,374 $1,371,316 $55,150 $34,100A Warrants $0 $0 $0 $0 $14,022 $78,187 $76,093 $171,519 $6,898 $4,265Common Warrants $0 $0 $0 $0 $0 $295,441 $265,177 $597,726 $24,039 $14,863Unallocated $0 $0 $0 $0 $0 $0 $383,207 $796,816 $32,046 $19,814Total $17,107,873 $824,810 $1,957,513 $975,682 $371,932 $4,297,779 $4,543,537 $10,482,047 $359,768 $261,072Total Option Value Option Value Total Shares Share Value Discount* Non-MarketableSeries C $20,771,208 5,934,632 $3.500 0.0% $3.500Series B $993,910 1,239,906 $0.802 0.0% $0.802Series A $1,098,545 1,714,171 $0.641 0.0% $0.641Common $12,626,224 20,000,000 $0.631 35.7% $0.406Allocated $2,912,013 5,239,012 $0.556 35.7% $0.358A Warrants $350,984 655,276 $0.536 35.7% $0.345Common Warrants $1,197,245 2,283,567 $0.524 35.7% $0.337Unallocated $1,231,883 3,044,179 $0.405 35.7% $0.260Total $41,182,012 40,110,742 Discount for Lack of Marketability*Implied Enterprise ValueImplied Equity Value (Backsolve) $41,182,012Plus: Debt $1,750,000Market Value of Invested Capital $42,932,012
  • 35. 29 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit C-1: Public Comparable Companies AnalysisOperating and Market Data Ticker Stock Market Enterprise LTM LTM NTM NTM(dollars in millions) Symbol Price Value Value Revenues EBITDA Revenue EBITDAComparable Public Companies 09/30/12salesforce.com, inc NYSE:CRM $152.69 $21,223.9 $20,674.6 $2,643.3 $116.2 $3,426.1 $150.7Concur Technologies, Inc. NasdaqGS:CNQR $73.73 $4,054.0 $3,822.1 $439.8 $50.7 $551.0 $63.5Kenexa Corp. NYSE:KNXA $45.83 $1,265.0 $1,208.4 $318.0 $26.7 $397.7 $33.3LogMeIn, Inc. NasdaqGS:LOGM $22.43 $555.1 $356.6 $134.2 $14.6 $156.8 $17.1Constant Contact, Inc. NasdaqGS:CTCT $17.40 $530.6 $449.5 $243.4 $22.6 $276.2 $25.7
  • 36. 30 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit C-2: Public Comparable Companies AnalysisMultiples and Margins Enterprise Value Gross EBITDA LTM Revenue LTM EBITDAWeight LTM Rev LTM EBITDA NTM Rev NTM EBITDA Margin Margin Growth Growth5Comparable Public Companies NTM Discount (19.8%) (22.1%)20% salesforce.com, inc 7.8x N/A 6.0x N/A 78.1% 4.4% 36.5% 1.0%20% Concur Technologies, Inc. 8.7x N/A 6.9x N/A 71.9% 11.5% 25.8% 10.4%20% Kenexa Corp. 3.8x N/A 3.0x N/A 60.0% 8.4% 32.1% 80.8%20% LogMeIn, Inc. 2.7x 24.4x 2.3x 20.9x 89.9% 10.9% 13.7% (17.5%)20% Constant Contact, Inc. 1.8x 19.9x 1.6x 17.5x 71.0% 9.3% 19.1% 21.9%Median 3.8x 22.1x 3.0x 19.2x 71.9% 9.3% 25.8% 10.4%Mean 5.0x 22.1x 4.0x 19.2x 74.2% 8.9% 25.4% 19.4%75th Percentile 7.8x 23.3x 6.0x 20.1x 78.1% 10.9% 32.1% 21.9%25th Percentile 2.7x 21.0x 2.3x 18.3x 71.0% 8.4% 19.1% 1.0%Weighted 5.0x 8.9x 4.0x 7.7xIn thousands of dollars (000) LTM Revenue LTM EBITDA NTM Revenue NTM EBITDAVenture Co. $6,812.0 ($6,337.8) $14,380.7 ($3,166.6)Mean Multiple 5.0x 22.1x 4.0x 19.2xImplied Enterprise Value $33,809.2 N/A $57,270.2 N/AAverage Enterprise Value $45,539.7Plus Cash $4,441.9Market Value of Invested Capital $49,981.6
  • 37. 31 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit C-3: Public Comparable Companies AnalysisBeta and Volatility Levered Debt / Effective Unlevered Volatility CalculationBeta Equity Tax Rate Beta 1 Year 2 Year 5 YearComparable Public Companiessalesforce.com, inc 1.40 N/A 40.0% N/A 41.7% 42.6% 47.8%Concur Technologies, Inc. 1.35 6.2% 40.0% 1.30 37.9% 38.6% 46.5%Kenexa Corp. 2.72 N/A 40.0% N/A 63.6% 57.0% 69.1%LogMeIn, Inc. 0.45 0.0% 62.0% 0.45 51.2% 46.6% N/AConstant Contact, Inc. 1.10 0.0% 40.0% 1.10 49.9% 49.6% N/AMedian 1.35 1.10 49.91% 46.56% 47.84%Mean 1.40 0.95 48.86% 46.87% 54.50%Beta Application to Venture Co.Unlevered Target Debt / Effective ReleveredBeta Equity Tax Rate BetaMedian 1.10 0.0% 40.0% 1.10Mean 0.95 2.1% 40.0% 0.96
  • 38. 32 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit D-1: Public Comparable Companies DescriptionsPublic Comparable Company DescriptionsName Descriptionsalesforce.com, inc salesforce.com, inc provides cloud computing and social enterprise solutions to various businesses and industries worldwide. The company delivers customer relationship managementapplications through Internet or cloud. Its cloud computing services enable customers to connect, engage, sell, service, and collaborate with customers. The company markets sales forceautomation features of its application services and customer service and support automation features under the Service Cloud brand name. It also provides Chatter applications for theenterprise to connect and share information securely and in real-time; Radian6 application that offers customers a tool for social media monitoring and marketing; and Data.com, whichprovides companies with a database of business contacts, company profiles, and social insights. In addition, the company offers The Force.com, a cloud computing platform, whichenables customers and developers to build complementary applications; Heroku Platform, a application development platform for application developers to build and deploy social andmobile applications; Database.com, an enterprise cloud database for developers to architect and build new mobile and social applications in the cloud; and The AppExchange, an onlinedirectory that allows customers to browse, sample, share, and install applications developed on its Force.com platform. Further, it provides professional services comprising consulting,deployment, and training services. The company markets its services primarily through its direct sales, and referral and indirect sales. salesforce.com, inc was founded in 1999 and isbased in San Francisco, California.Concur Technologies, Inc. Concur Technologies, Inc. provides integrated travel and expense management solutions for companies of various industries, sizes, and geographies. It offers the Concur Connect platform,a cloud computing software solution primarily on a subscription basis, which enables customers, partners, suppliers, and third-party developers to connect. The company provides varioussolutions to streamline the travel procurement, itinerary management, expense management, and invoice management processes. Its solutions include online travel procurement solutions,which automate corporate travel booking and processing; itinerary management solutions that enable individual business travelers and their organizations to manage and share travelitinerary information; and automated expense management solutions, which simplify the expense reporting process. The company also offers other value-added and extended services thatleverage its integrated cloud offerings, including expense reimbursement; expense report auditing services to streamline the process of managing and substantiating expense receipts;business intelligence that enable customers to use captured data to analyze trends, influence budget decisions, improve forecasting, and monitor for fraudulent activity; and invoicemanagement solutions to automate, simplify, and reduce the costs associated with the process of entering, approving, and managing the payment of vendor invoices. In addition, itprovides consulting; and various extended services, such as site administration, audit and compliance services, advanced analytics, and customized integration in connection with itsintegrated travel and expense management solutions. Concur markets and sells its solutions worldwide through direct sales organizations; and indirect distribution channels, such asstrategic resellers and referral partners, as well as through its Website. The company was founded in 1993 and is headquartered in Redmond, Washington.
  • 39. 33 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit D-2: Public Comparable Companies DescriptionsPublic Comparable Company DescriptionsName DescriptionKenexa Corp. Kenexa Corporation, together with its subsidiaries, provides software-as-a-service solutions that enable organizations to recruit, retain, and develop employees. The company offers talentacquisition solutions, such as recruitment technology systems that locates and tracks talented candidates; onboarding solutions, which provide form management for legal documents,workflow, and electronic signatures; employee assessments that help organizations to select and retain top performers; and skills tests, which enable organizations to identify and selecttalented candidates. Its talent acquisition solutions also include Kenexa Interview Builder system that provides an online structured interview reference library of approximately 3,000questions; employment branding solutions; and recruitment process outsourcing (RPO) solutions, which offer global recruitment services. The company also provides talent retentionsolutions comprising performance management solutions that integrate performance management, compensation management, career development, goal alignment, and successionplanning; employee surveys; learning management solutions, which enable organizations to deliver and track employee learning; leadership solutions, including leadership audit,leadership assessments, and leadership development solutions; CompAnalyst suite of compensation management solutions; and consumer solutions that provide compensation-focusedtools and content. It serves financial services and banking, manufacturing, government, life sciences, biotechnology and pharmaceuticals, retail, healthcare, hospitality, call centers, andeducation industries. Kenexa Corporation operates primarily in the United States, the United Kingdom, Germany, the Netherlands, Canada, China, and other European countries. Thecompany was formerly known as TalentPoint, Inc. and changed its name to Kenexa Corporation in November 2000. Kenexa Corporation was founded in 1987 and is headquartered inWayne, Pennsylvania.LogMeIn, Inc. LogMeIn, Inc. develops and markets a suite of remote access, remote support, and collaboration solutions in the United States, the United Kingdom, and internationally. The companyprovides remote user access services, including LogMeIn Free, a free remote access service, which provides secure access to a remote computer or other Internet-enabled device; LogMeInPro, a remote access service; LogMeIn Hamachi, a hosted virtual private network service; LogMeIn Ignition that delivers one click access to remote computers that subscribe to LogMeInFree or LogMeIn Pro; Pachube, a hosted service for building and running Internet of things applications; and LogMeIn for iPad/iPhone, a mobile application for iOS devices. It also offerscustomer care, remote support, and device management services comprising LogMeIn Rescue, a Web-based remote support and customer care service to support remote tablets,smartphones and computers, and applications, as well as assist computer users via the Internet; LogMeIn Rescue+Mobile, an add-on of LogMeIn Rescue’s Web-based remote supportservice to remotely access and support smartphones and tablet computers; BoldChat, a Web-based live chat and click-to-call service; LogMeIn Central, a Web-based management console;and LogMeIn Backup, a service that subscribers install on two or more computers to create a backup network. In addition, the company provides remote collaboration services, such asjoin.me and join.me pro, which are browser-based online meetings and screen sharing services. It serves small and medium-sized businesses, information technology service providers,mobile carriers, customer service centers, original equipment manufacturers, and consumers. The company was formerly known as 3am Labs, Inc. and changed its name to LogMeIn, Inc.in March 2006. LogMeIn, Inc. was founded in 2003 and is based in Woburn, Massachusetts.
  • 40. 34 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit D-3: Public Comparable Companies DescriptionsPublic Comparable Company DescriptionsName DescriptionConstant Contact, Inc. Constant Contact, Inc. provides on-demand email marketing, social media marketing, event marketing, and online survey products primarily in the United States. It offers emailmarketing products, which allow customers to create, send, and track professional and affordable permission-based email marketing campaigns; and social media marketing products thatallow customers to manage and optimize their presence across multiple social media networks. The company also provides event marketing products, which enable its customers topromote and manage events, communicate with invitees and registrants, capture and track registrations, and collect online payments; and online survey products that enable its customersto create and send surveys, and analyze the responses. In addition, it offers customer support services to customers and trailers through phone, chat, email, and social media. Further, thecompany provides ancillary services, such as custom services to customers who like its email campaigns, event promotions, or surveys prepared for them; and online training programs toeducate participants on email marketing and social media marketing best practices, as well as a workshop programs. It markets its products directly for small organizations, includingretailers, restaurants, law and accounting firms, consultants, non-profits, religious organizations, and alumni associations. The company was formerly known as Roving SoftwareIncorporated and changed its name to Constant Contact, Inc. in 2006. Constant Contact, Inc. was founded in 1995 and is headquartered in Waltham, Massachusetts.
  • 41. 35 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit E-1: Comparable Transactions AnalysisMultiples Analysis (dollars in millions) Implied LTM LTM LTM Revenue LTM EBITDAWeight Date Target Name Acquirer Name EV Revenue EBITDA Mutliple Multiple8Comparable Precedent Transactions Used? Used?13% 10/18/11 IQTR141453382 IQ25022195 eResearchTechnology, Inc. Keynote Systems Inc. $89.8 $20.0 ($1.3) 4.5x 1 N/A 113% 05/26/10 IQTR98125456 IQ111358 SkillSoft plc (nka:SSI Investments II Limited) Advent International Corporation $1,127.3 $315.0 $116.0 3.6x 1 9.7x 113% 04/05/12 IQTR168060609 IQ683161 Taleo Corp. Warburg Pincus LLC $1,805.5 $315.4 $29.6 5.7x 1 60.9x 113% 02/14/12 IQTR144260754 IQ93713 DemandTec, Inc. International Business Machines Corporation $426.9 $89.1 ($7.8) 4.8x 1 N/A 113% 02/15/12 IQTR143976841 IQ34879 SuccessFactors, Inc. SAP America, Inc. $3,516.0 $291.8 ($27.2) 12.0x 1 N/A 113% 07/15/11 IQTR130828541 IQ34067 Savvis, Inc. CenturyLink, Inc. $2,962.7 $973.4 $229.2 3.0x 1 12.9x 113% 04/01/11 IQTR129212824 IQ1994418 Allegient Systems, Inc. Bottomline Technologies (de), Inc. $49.8 $14.4 $3.0 3.4x 1 16.7x 113% 01/25/12 IQTR142032139 IQ94412 Rightnow Technologies Inc. Oracle Corporation $1,521.4 $216.2 $23.9 7.0x 1 63.8x 1Median 4.6x 16.7xMean 5.5x 32.8x75th Percentile 6.1x 60.9x25th Percentile 3.5x 12.9xWeighted 5.5x 20.5xIn thousands of dollars (000) LTM Revenue LTM EBITDA NTM Revenue NTM EBITDAVenture Co. $6,812.0 ($6,337.8) $14,380.7 ($3,166.6)Mean Multiple 5.5x 32.8x 4.4x 28.4xImplied Enterprise Value $37,604.8 N/A $63,699.7 N/AAverage Enterprise Value $50,652.2Plus Cash $4,441.9Market Value of Invested Capital $55,094.2
  • 42. 36 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit E-2: Comparable Transactions AnalysisGrowth & Margin Analysis LTM Revenue LTM EBITDA Gross EBITDA Net 1 WeekTarget Name Growth Growth Margin Margin Margin PremiumComparable Precedent TransactionseResearchTechnology, Inc. N/A N/A 55.7% (6.4%) (19.7%) N/ASkillSoft plc (nka:SSI Investments II Limited) (2.4%) 0.9% 90.8% 35.8% 20.7% 17.6%Taleo Corp. 32.9% (2.6%) 67.2% 9.4% (5.5%) 24.1%DemandTec, Inc. 11.8% N/A 63.9% (8.8%) (21.7%) 72.5%SuccessFactors, Inc. 59.3% N/A 66.1% (12.7%) (11.0%) 77.3%Savvis, Inc. 16.6% 29.8% 47.5% 23.7% (4.6%) 9.5%Allegient Systems, Inc. 18.2% 36.3% 64.8% 20.7% 12.1% N/ARightnow Technologies Inc. 23.0% 43.3% 69.9% 11.0% 12.3% 10.5%Median 18.2% 29.8% 65.4% 10.2% (5.0%) 20.9%Mean 22.8% 21.5% 65.7% 9.1% (2.2%) 35.3%75th Percentile 28.0% 36.3% 67.9% 21.4% 12.2% #¡NUM!25th Percentile 14.2% 0.9% 61.8% (7.0%) (13.2%) 12.3%
  • 43. 37 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit F-1: Comparable Transactions – Target Company DescriptionsComparable Transaction Target Company DescriptionsName DescriptioneResearchTechnology, Inc. Keynote DeviceAnywhere Inc. provides a platform for the planning, testing, and monitoring of mobile applications. It offers testing, monitoring, and measurement productsand services for various enterprises, such as online portals, e-commerce sites, B2B sites, mobile operators, and mobile infrastructure providers. The company provides mALM,a mobile application lifecycle management product; Test Center Enterprise Interactive that offers cloud-based testing for internal and external-facing mobile applications andWebsites, including support, training, and services; and Test Center Enterprise Automation that automates the testing of mobile applications. It also offers Test CenterEnterprise Monitoring, which provides performance monitoring for mobile applications and Websites to detect potential problems; Test Center Developer, a device lab formobile applications developer; Device Planner that helps users to identify the productive mobile platforms and devices for their applications or Website; and Test Planner,which helps optimize test plans for mobile applications. Its customers include information technology, engineering, and quality assurance departments from organizationsaround the world in finance, healthcare, retail, e-commerce, and media/entertainment. The company has strategic partnerships with Hewlett-Packard Company andInternational Business Machines. Keynote DeviceAnywhere Inc. was formerly known as Mobile Complete, Inc. The company was founded in 2003 and is based in San Mateo,California. As of October 18, 2011, Keynote DeviceAnywhere Inc. operates as a subsidiary of Keynote Systems Inc.SkillSoft plc (nka:SSI Investments IILimited)SSI Investments II Limited, through its subsidiaries, engages in the provision of on-demand e-learning and performance support solutions for enterprises, government,education, and small and medium-sized businesses worldwide. Its products include SkillChoice multi-modal learning solutions that offer various resources to support formaltraining and informal performance support needs; SkillPort for managing e-learning programs; SkillSoft Dialogue, a virtual classroom platform for live and on-demandlearning sessions; KnowledgeCenters learning portals that allow learners instant access to content; business impact series, which include the audio-driven dramatizations ofworkplace business problems and solutions; and challenge series titles that provide interactive case studies. The company’s products also consist SkillSoft leadershipadvantage, a pre-packaged learning portal; business skills courseware collection comprising courseware titles; IT Skills courseware collection that include softwaredevelopment, operating systems and server technologies, Internet and network technologies, IT security, enterprise database systems, and Web design courseware titles;desktop skills courseware collection; and legal compliance, federal government compliance, and environmental safety and health courseware collection. In addition, itoperates leadership development channel that offers a collection of live and on-demand video learning presentations. Further, the company provides online mentoring,books24x7 library access, and executive content services. It sells its products through a direct field sales force and resellers. The company was formerly known as SSIInvestments II Limited and changed its name on May 26, 2010. SSI Investments II Limited was founded in 1989 and is headquartered in Nashua, New Hampshire.
  • 44. 38 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit F-2: Comparable Transactions – Target Company DescriptionsComparable Transaction Target Company DescriptionsName DescriptionTaleo Corp. Taleo Corporation provides on-demand talent management software solutions. The company’s products include Taleo Enterprise that supports medium and large enterprisesin talent management processes comprising sourcing, recruiting, onboarding, performance management, goals management, development planning, succession planning,compensation, and learning; and Taleo Business Edition, which supports smaller and more centralized organizations, stand-alone departments and divisions of largerorganizations, and staffing companies in recruiting, onboarding, performance management, compensation, and learning. It also operates the Taleo Knowledge Exchange, anonline customer forum and social network that enables its customers to share and discuss talent management topics, product ideas, and best practices; the Taleo SolutionExchange, an online partner application and solution marketplace, which enables its customers to explore, evaluate, demo, and compare products and services from the Taleopartner ecosystem; and the Taleo Talent Exchange, a crowd-sourced talent marketplace to source active and passive candidates, share candidates, and enable job seekers tofind the right positions and apply for open positions using their universal profile. In addition, the company provides professional services, such as implementation, solutionoptimization and expansion, technical, and training services. It serves organizations in the business services, consumer goods, energy, financial services, healthcare,manufacturing, technology, transportation, government, and retail sectors. The company offers its software applications primarily on a subscription basis through its directsales force and strategic partners in the United States, Canada, Europe, and Australia. The company was formerly known as Recruitsoft, Inc. and changed its name to TaleoCorporation in March 2004. Taleo Corporation was incorporated in 1999 and is headquartered in Dublin, California. As of April 5, 2012, Taleo Corp. operates as a subsidiaryof Oracle Corporation.DemandTec, Inc. DemandTec, Inc. provides collaborative optimization network of software services connecting retailers and consumer products (CP) companies. Its solutions includeDemandTec Lifecycle Price Optimization, which enables retailers to price items at various stages in their lifecycle consisting of new items, regular items, promoted items, andclearance items; DemandTec End-to-End Promotion Management that enables retailers to manage the processes related to retail promotions, such as collaborative promotionplanning, CP vendor deal management, in-store promotion execution, and post-event analysis; and DemandTec Assortment & Space, which enables retailers to createlocalized assortments by store, cluster, or section, based on shopper demographics, the competitive environment, and a science-based quantitative understanding. Thecompany provides DemandTec Shopper Insights and DemandTec Targeted Marketing, which are a collection of services that enable retailers and their CP trading partners tounderstand key shopper insights, define shopper segments, and plan shopper merchandising and marketing programs for various consumer segments; DemandTec MarketingPlan Optimization, which enables CP executive and brand managers to develop strategic marketing investment allocation decisions and optimize marketing mix decisions;and DemandTec Total Trade Optimization that enables CP companies to optimize and manage the spectrum of trade funds decisions. It also offers consulting and analyticalservices. The company sells its applications by means of a software-as-a-service, as well as through its direct sales organization in cooperation with entities, such as systemsintegration firms, strategy consultants, and syndicated data providers. It sells its products primarily in North America, Europe, and South America. The company was foundedin 1999 and is based in San Mateo, California. As of February 14, 2012, DemandTec, Inc. operates as a subsidiary of International Business Machines Corp.
  • 45. 39 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit F-3: Comparable Transactions – Target Company DescriptionsComparable Transaction Target Company DescriptionsName DescriptionSuccessFactors, Inc. SuccessFactors, Inc. provides cloud-based business execution software solutions for organizations to bridge the gap between business strategy and results worldwide. Thecompany’s application suite includes modules and capabilities comprising Performance Management to deliver content that enables managers to provide feedback to reports;Goal Management to support the process of creating, monitoring, and assessing employee goals; 360-Degree Review to support the collection of feedback from an employee’speers, reports, and superiors; Calibration & Team Rater to identify top and lower performers; Learning that combines formal, social, and extended learning with contentmanagement, reporting, and analytics; Succession & Development to provide visibility into an organization’s talent pool; Career & Development Planning to align learningactivities with an employee’s competency gaps; and Compensation to facilitate the processes of merit pay adjustments, bonus allocations, calibrations, and distribution ofstock-based awards. Its application suite also comprises Analytics and Reporting to provide visibility into key performance and talent data in the organization; RecruitingManagement to identify, screen, select, hire, and on-board job applicants; Employee Central, a HR information system; Jam Social Learning and Collaboration Platform toenhance employee creativity, spontaneity, and teamwork; Proprietary and Third-Party Content for competencies, goals, job descriptions, skills, surveys, and wage data; andRecruiting Marketing product. In addition, it offers implementation and strategic consulting services. SuccessFactors has a strategic partnership with Korn/FerryInternational. The company was formerly known as Success Acquisition Corporation and changed its name to SuccessFactors, Inc. in April 2007. The company was foundedin 2001 and is headquartered in San Mateo, California. As of February 15, 2012, SuccessFactors, Inc. operates as a subsidiary of SAP America, Inc.Savvis, Inc. Savvis, Inc. an information technology (IT) services company, provides cloud, managed hosting, managed security, colocation, professional, and network services tobusinesses and government agencies worldwide. The company offers hosting services comprising colocation services for clients seeking data center space and power for theirserver and networking equipment needs; and managed hosting services for clients’ IT infrastructure and network needs. Its managed hosting services include cloud services;assistance and consultation in security for network and hosting environments, virtualization, Web-based applications, business recovery, software-as-a-service, programmanagement, and infrastructure and migration; dedicated hosting services; utility computing and storage services; and managed security services for the monitoring andmanagement of security appliances, software, and network-based controls. The company also offers managed network services, including managed VPN services that includehardware, management systems, and operations to transport an enterprise’s voice, video, and data applications; hosting area network services that provide high-speedInternet connectivity for hosting and cloud clients; and bandwidth services to enterprises and wholesale carrier clients, which comprise tier-1 Internet services in NorthAmerica, Europe, and Asia that are managed, unmanaged, or integrated with its VPN. It serves its clients in various industries, including financial services, media andentertainment, software, and government sectors through direct sales force, indirect sales channels, and marketing programs. It was formerly known as SAVVISCommunications Corporation and changed its name to Savvis, Inc. in May 2005. The company was founded in 1995 and is based in Town & Country, Missouri. As of July15, 2011, Savvis, Inc. operates as a subsidiary of CenturyLink, Inc.
  • 46. 40 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit F-4: Comparable Transactions – Target Company DescriptionsComparable Transaction Target Company DescriptionsName DescriptionAllegient Systems, Inc. Allegient Systems, Inc. provides software and services that assist legal departments to manage bill payment and expense management, as well as make informed decisions. Itprovides outsourced bill reviews, software-based reviews and analysis, and company data captured from the bill review processes for insurance and law companies. Thecompany’s products include the Expense and Performance Management Suite, which provides standard reports and introductory business intelligence tools that support theday-to-day tactical analysis of legal expense management; and Performance Management Consulting, which generates and displays strategic management information basedon the data drawn from data collection. Allegient Systems, Inc. was formerly known as Law Audit Services, Inc. The company was founded in 1988 and is headquartered inWilton, Connecticut with additional sales offices in Chicago, Illinois; and Toronto, Canada. As of April 1, 2011, Allegient Systems, Inc. operates as a subsidiary of BottomlineTechnologies Inc.Rightnow Technologies Inc. Rightnow Technologies, Inc. provides cloud-based customer experience software products and services. The company primarily offers RightNow CX, a customer experiencesuite for consumer-centric organizations to enable interactions across Web, social, and contact center touch points. Its RightNow CX suite includes RightNow Web Experience,which integrates into an existing Web infrastructure to provide an online customer experience providing customer access to Web self-service; RightNow Social Experiencethat enables organizations to listen and respond to conversations with their consumers on the social Web and to build branded communities to cultivate their ownconversations; and RightNow Contact Center Experience, which enables organizations to deliver consistent customer experiences across multi-channel interactions. Thecompany’s RightNow CX suite also comprises RightNow Engage, which provides horizontal service, sales, and marketing business processes that support, span, and inter-connect the Web, social, and contact center experiences; RightNow CX Cloud Platform that provides a platform for scalability, performance, flexibility, and security;RightNow Mission Critical Operations, a cloud delivery platform; and RightNow CX Commitment, which describes the way to deliver a customer experience. It also providesprofessional services, including project management and consulting services. Rightnow Technologies, Inc. serves various industries, such as technology, public sector,retail/consumer packaged goods, entertainment, financial services, telecommunication, and travel and hospitality industries. The company sells its products and servicesthrough its direct sales organization, as well as through partner channels, system integrators, and resellers in North America, Europe, and the Asia Pacific. RightnowTechnologies, Inc. was founded in 1995 and is headquartered in Bozeman, Montana.
  • 47. 41 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit G: Historical and Projected Income StatementIn thousands of dollars (000) Historicals ending Dec 31, LTM Projections ending Dec 31,2010 2011 9/30/12 2012 2013 2014 2015 2016Total Revenue $795.0 $3,925.0 $6,812.0 $8,893.0 $16,230.0 $36,028.0 $45,000.0 $65,000.0Total Cost of Sales $119.3 $549.5 $1,021.8 $1,334.0 2,434.5 5,404.2 6,750.0 9,750.0Gross Profit 675.8 3,375.5 5,790.2 7,559.1 13,795.5 30,623.8 38,250.0 55,250.0Operating Expenses 3,217.0 7,277.0 12,128.0 14,560.0 15,670.0 30,100.0 36,000.0 49,600.0EBITDA ($2,541.3) ($3,901.5) ($6,337.8) ($7,001.0) ($1,874.5) $523.8 $2,250.0 $5,650.0D&A 35.0 57.0 88.0 102.0 209.6 285.8 336.6 387.4EBIT (2,576.3) (3,958.5) (6,425.8) (7,102.9) (2,084.1) 238.0 1,913.5 5,262.7Interest Expense / (Income) 61.0 15.0 228.0 236.7 68.9 (547.0) (1,169.8) (1,925.1)Other Expense / (income) (57.0) (14.0) 246.0 246.0 0.0 0.0 0.0 0.0Pretax Income (2,580.3) (3,959.5) (6,899.8) (7,585.6) (2,152.9) 785.0 3,083.3 7,187.8Income Taxes / (Benefit) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Income ($2,580.3) ($3,959.5) ($6,899.8) ($7,585.6) ($2,152.9) $785.0 $3,083.3 $7,187.8Performance MetricsRevenue Growth Rate #¡DIV/0! 393.7% NA 126.6% 82.5% 122.0% 24.9% 44.4%COGS Margin 15.0% 14.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%Gross Margin 85.0% 86.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0%Operating Expenses 404.7% 185.4% 178.0% 163.7% 96.5% 83.5% 80.0% 76.3%EBITDA Margin (319.7%) (99.4%) (93.0%) (78.7%) (11.5%) 1.5% 5.0% 8.7%
  • 48. 42 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit H: Historical and Projected Balance SheetIn thousands of dollars (000) Historicals ending Dec 31, As of Projections ending Dec 31,2010 2011 9/30/12 2012 2013 2014 2015 2016Cash and equivalents $3.0 $15.9 $4,441.9 $15,750.5 $12,581.0 $12,666.7 $15,381.3 $21,700.7Accounts Receivable $596.8 2,119.0 951.8 1,242.5 2,267.7 5,033.9 6,287.5 9,081.9Other Current Assets $5.2 102.8 91.1 119.0 217.1 482.0 602.1 869.6Total Current Assets 605.0 2,237.7 5,484.8 17,112.0 15,065.8 18,182.6 22,270.8 31,652.2PP&E 68.9 214.3 376.2 194.2 102.3 51.6 (20.7) (64.5)Other Assets 59.6 49.5 53.6 53.6 94.7 94.7 94.7 94.7Total LT Assets 128.5 263.8 429.8 247.8 196.9 146.3 74.0 30.2Total Assets $733.5 $2,501.6 $5,914.6 $17,359.7 $15,262.7 $18,328.8 $22,344.8 $31,682.4Accounts Payable 48.8 262.7 409.4 491.5 528.9 1,016.0 1,215.2 1,674.2Accrued Liabilities 78.2 95.0 40.3 48.3 52.0 99.9 119.5 164.7Short-Term Debt 0.0 1,730.8 1,500.0 1,414.5 553.5 553.5 553.5 553.5Other Current Liabilities 754.6 1,282.9 1,467.5 1,761.8 1,896.1 3,642.2 4,356.1 6,001.8Total Current Liab. 881.5 3,371.4 3,417.2 3,716.1 3,030.6 5,311.7 6,244.3 8,394.2Long-Term Debt 0.0 39.6 250.0 256.6 1,006.6 1,006.6 1,006.6 1,006.6Other LT Liabilities 0.0 0.0 17.6 8.5 0.0 0.0 0.0 0.0Total LT Liabilities 0.0 39.6 267.6 265.2 1,006.6 1,006.6 1,006.6 1,006.6Total Liabilities 881.5 3,411.0 3,684.8 3,981.3 4,037.2 6,318.3 7,251.0 9,400.8Total Equity (148.0) (909.4) 2,229.9 13,378.4 11,225.5 12,010.5 15,093.8 22,281.6Total Liab. and Equity $733.5 $2,501.6 $5,914.6 $17,359.7 $15,262.7 $18,328.8 $22,344.8 $31,682.4
  • 49. 43 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit I: Projected Cash Flow StatementIn thousands of dollars (000) Projections ending Dec 31,2012 2013 2014 2015 2016Net Income From Continuing Operations (7,585.6) (2,152.9) 785.0 3,083.3 7,187.8Depreciation & Amortization 102.0 209.6 285.8 336.6 387.4Stock-Based Compensation Expense 0.0 0.0 0.0 0.0 0.0Change in Working Capital 1,521.4 (947.8) (750.0) (441.0) (912.1)Cash Flow from Operations (5,962.2) (2,891.2) 320.8 2,978.9 6,663.0Capital Expenditures (81.8) (117.7) (235.1) (264.3) (343.5)Other Assets (4.1) (41.1) 0.0 0.0 0.0Additions to Intangibles 0.0 0.0 0.0 0.0 0.0Cash Flow from Investments (85.9) (158.7) (235.1) (264.3) (343.5)Cash Flow Available for Financing Activities ($6,048.1) ($3,049.9) $85.7 $2,714.6 $6,319.4Issuance / (Repurchase) of Equity 21,873.5 0.0 0.0 0.0 0.0Issuance / (Repurchase) of Debt (90.8) (119.5) 0.0 0.0 0.0Cash Flow from Financing Activities 21,782.7 (119.5) 0.0 0.0 0.0Net Change in Cash $15,734.6 ($3,169.5) $85.7 $2,714.6 $6,319.4Beginning Cash Balance $15.9 $15,750.5 $12,581.0 $12,666.7 $15,381.3Ending Cash Balance $15,750.5 $12,581.0 $12,666.7 $15,381.3 $21,700.7
  • 50. 44 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit J: Discounted Free Cash FlowsFree Cash Flow Summary Projections ending Dec 31,In thousands of dollars (000) 2011 2012 2013 2014 2015 2016Revenue $3,925.0 $8,893.0 $16,230.0 $36,028.0 $45,000.0 $65,000.0Growth Rate 126.6% 82.5% 122.0% 24.9% 44.4%EBITDA ($3,901.5) ($7,001.0) ($1,874.5) $523.8 $2,250.0 $5,650.0Margin (99.4%) (78.7%) (11.5%) 1.5% 5.0% 8.7%Depreciation & Amortization 57.0 102.0 209.6 285.8 336.6 387.4Margin 1.5% 1.1% 1.3% 0.8% 0.7% 0.6%Capex & Additions to Intangibles 81.8 117.7 235.1 264.3 343.5Margin 0.9% 0.7% 0.7% 0.6% 0.5%EBITDA ($7,001.0) ($1,874.5) $523.8 $2,250.0 $5,650.0Less: Depreciation & Amortization (102.0) (209.6) (285.8) (336.6) (387.4)EBIT (7,102.9) (2,084.1) 238.0 1,913.5 5,262.7Less: Cash Taxes 0.0 0.0 0.0 0.0 0.0Plus: Depreciation & Amortization 102.0 209.6 285.8 336.6 387.4Less: Capex (81.8) (117.7) (235.1) (264.3) (343.5)Change in Working Capital 1,521.4 (947.8) (750.0) (441.0) (912.1)Unlevered Free Cash Flows ($5,561.3) ($2,940.0) ($461.3) $1,544.8 $4,394.3Cash Flows Remaining through EOY ($1,401.8) ($2,940.0) ($461.3) $1,544.8 $4,394.3Discount Periods (mid-year convention) 0.13 0.75 1.75 2.75 3.75Present Value of FCFs ($1,330.6) ($2,154.2) ($223.5) $495.0 $931.3Total Present Value of Free Cash Flows ($2,282.0)WACC 51.2%NPV of FCFs ($2,282.0)PV of Terminal Value $46,888.5Enterprise Value $44,606.5Plus: Non-Operating Cash $0.0Market Value of Invested Capital $44,606.5
  • 51. 45 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit K: WACC & Terminal Value CalculationCost of Equity CommentsRelevered Beta 0.96x Market risk premium 5.0% S&P 500 returns relative to T-bonds from 1945 to 2009+ Risk free rate 2.4% Yield on 20 year Treasury bonds+ Size discount 6.0% Duff & Phelps size discount+ Company specific discount 39.0% Company specific risk premium= Cost of Equity 52.2%Weighted Average Cost of Capital Required Rates of Return for Venture-Backed Private Companies*Cost of equity 52.2% Stage of development Plummer Scherlis, et al.x Equity/Total Cap 97.9% Start-up 50 - 70% 50 - 70%Weighted average cost of equity 51.1% First stage or "early development" 40 - 60% 40 - 60%Second stage or "expansion" 35 - 50% 30 - 50%Average cost of debt 5.5% Bridge/IPO 25 - 35% 20 - 35%x (1 - tax rate) 60.0% * AICPA Practice Aidx Debt/Total Cap 2.1%Weighted average cost of debt 0.1%Weighted average cost of capital 51.2%Terminal Value (Exit Multiple Method) Revenue EBITDA2016 Metrics $65,000.0 $5,650.0Estimated Exit Multiple 5.5x 32.8x$358,824.4 $185,308.7Estimated Exit Value $272,066.5Discount Rate 51.2%PV of Terminal Value $46,888.5
  • 52. 46 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit L: Capitalization Table Analysisz Series C Series B Series A A Warrants Common Common Allocated Unallocated TotalInvestment Date 9/30/2011 3/1/2011 10/8/2010 ENTER DATA ENTER DATA ENTER DATA ENTER DATA ENTER DATA TotalInvested Capital $20,771,210 $1,102,276 $308,551 - - - - - $22,182,037Price per share $3.500 $0.889 $0.180 - - - - - TotalShares Issued 5,934,632 1,239,906 1,714,171 655,276 20,000,000 2,283,567 5,239,012 3,044,179 TotalStrike Price - - - $0.180 - $0.200 $0.140 $0.490 TotalConversion Rate 1.0x 1.0x 1.0x 1.0x - - - - TotalShares (as converted) 5,934,632 1,239,906 1,714,171 655,276 20,000,000 2,283,567 5,239,012 3,044,179 40,110,742Ownership % 14.8% 3.1% 4.3% 1.6% 49.9% 5.7% 13.1% 7.6% 100.0%Liquidation Preference (x) 1.0x 1.0x 1.0x 1.0x - - - - TotalTotal Liquidation Preference $20,771,210 $1,102,276 $308,551 $117,950 $0 $0 $0 $0 $22,299,987Participating Preferred? Y N N N - - - - TotalPart. Cap Imposed? Y - - - - - - - TotalParticipation Cap (x) 3.0x - - - - - - - TotalPost-Money Valuation $140,387,597Pre-Money Valuation $119,616,387
  • 53. 47 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit M: Break Point AnalysisOption 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 7 Option 8 Option 9 Option 10Definition: Before thisbreakpoint…Series CliquidationpreferenceSeries B & AliquidationpreferenceCommonparticipatesAllocated optionsexerciseSeries A convertsto commonCommonWarrantsexerciseUnallocatedoptionsparticipate invalueSeries B convertsto commonSeries C reaches3.0xparticipation capSeries C convertsinto CommonstockPrice per Common Share $0.000 $0.000 $0.140 $0.180 $0.200 $0.490 $0.889 $7.000 $10.500 InfinitySeries C $20,771,210 $20,771,210 $21,602,059 $21,979,075 $22,108,773 $23,895,869 $26,474,555 $62,313,631 $62,313,631 Pro RataSeries B $0 $1,102,276 $1,102,276 $1,102,276 $1,102,276 $1,102,276 $1,102,276 $8,780,916 $13,120,586 Pro RataSeries A $0 $308,551 $308,551 $308,551 $386,344 $902,532 $1,647,365 $12,139,622 $18,139,218 Pro RataCommon $0 $0 $2,800,000 $4,070,565 $4,507,652 $10,530,252 $19,220,552 $141,638,438 $211,638,438 Pro RataAllocated $0 $0 $0 $332,825 $447,321 $2,024,944 $4,301,373 $36,368,812 $54,705,354 Pro RataA Warrants $0 $0 $0 $0 $29,738 $227,061 $511,788 $4,522,662 $6,816,128 Pro RataCommon Warrants $0 $0 $0 $0 $0 $745,614 $1,737,858 $15,715,332 $23,707,817 Pro RataUnallocated $0 $0 $0 $0 $0 $0 $1,433,892 $20,066,992 $30,721,619 Pro RataOption Proceeds $0 $0 $0 $733,462 $851,411 $1,308,125 $2,799,773 $2,799,773 $2,799,773 $2,799,773Breakpoints $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 Infinity
  • 54. 48 | P a g eV a l ua ti o n , A na l yti c s, & Ca p T ab l e Ma na g em e n tExhibit N: Option Pricing MethodOption Value Analysis Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 7 Option 8 Option 9 Option 10Definition: Before this breakpoint… Series CliquidationpreferenceSeries B & Aliquidation preferenceCommonparticipatesAllocated optionsexerciseSeries A converts tocommonCommonWarrantsexerciseUnallocatedoptionsparticipate invalueSeries B convertsto commonSeries C reaches3.0xparticipation capSeries C convertsinto CommonstockBreak Points $0 $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 InfinityCurrent Equity Value (Price) $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573Exercise $0 $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 InfinityRiskfree Rate 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31%Maturity (in years) 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0Volatility 54% 54% 54% 54% 54% 54% 54% 54% 54% 54% 54%d1 28.942 1.333 1.264 1.103 1.025 0.995 0.654 0.275 (1.501) (1.855) 0.000d2 27.998 0.389 0.320 0.159 0.081 0.051 (0.290) (0.669) (2.445) (2.799) 0.000Call Option Value: $46,403,573 $28,763,403 $27,871,048 $25,735,075 $24,660,647 $24,249,313 $19,421,999 $14,152,891 $929,712 $405,738 $0Incremental Option Value $17,640,170 $892,355 $2,135,972 $1,074,429 $411,334 $4,827,313 $5,269,108 $13,223,179 $523,975 $405,738Option Value of Security Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 7 Option 8 Option 9 Option 10Series C $17,640,170 $0 $488,775 $204,543 $67,632 $795,364 $799,205 $1,933,391 $0 $60,031Series B $0 $697,195 $0 $0 $0 $0 $0 $414,235 $19,010 $12,542Series A $0 $195,160 $0 $0 $40,566 $229,734 $230,844 $566,020 $26,281 $17,340Common $0 $0 $1,647,197 $689,319 $227,924 $2,680,416 $2,693,361 $6,604,011 $306,632 $202,309Allocated $0 $0 $0 $180,567 $59,705 $702,136 $705,527 $1,729,925 $80,322 $52,995A Warrants $0 $0 $0 $0 $15,507 $87,821 $88,245 $216,372 $10,046 $6,628Common Warrants $0 $0 $0 $0 $0 $331,842 $307,524 $754,035 $35,011 $23,099Unallocated $0 $0 $0 $0 $0 $0 $444,402 $1,005,190 $46,672 $30,793Total $17,640,170 $892,355 $2,135,972 $1,074,429 $411,334 $4,827,313 $5,269,108 $13,223,179 $523,975 $405,738Total Option Value Option Value Total SharesShare Value(Marketable)MarketabilityDiscountShare Value (Non-Marketable)Series C $21,989,112 5,934,632 $3.705 0.0% $3.705Series B $1,142,982 1,239,906 $0.922 0.0% $0.922Series A $1,305,945 1,714,171 $0.762 0.0% $0.762Common $15,051,167 20,000,000 $0.753 35.7% $0.484Allocated $3,511,178 5,239,012 $0.670 35.7% $0.431A Warrants $424,620 655,276 $0.648 35.7% $0.417Common Warrants $1,451,511 2,283,567 $0.636 35.7% $0.409Unallocated $1,527,057 3,044,179 $0.502 35.7% $0.323Total $46,403,573 40,110,742