The Startup Advisor Lunch & Learn series by SP3NW provides the opportunity for startup founders to learn from professionals regarding developing different business aspect of their company.
The event held in May 2022 was on valuation approaches & agreements, presented by Scott Martin, CPA/ABV, ASA and Mackenzie Marr, CPA of Anastasi, Moore, and Martin.
Past topics include branding and state/local taxes. Our next lunch and learn is July 28th, 2022. We hope to see you there!
2. Valuing Early-Stage Companies
and Agreements
Your Startup Advisory Board
May 26, 2022
Presented by
Scott H. Martin, CPA/ABV, ASA
Mackenzie Marr, CPA
3. ∗ Fair Market Value – Willing buyer, willing seller, both having
knowledge of all relevant facts and neither being under any
compulsion to buy or sell. Revenue Ruling 59-60.
∗ Investment Value – The value of a business to a particular buyer
based upon a return on investment analysis and the unique
circumstances of the transaction.
∗ Fair Value – The Uniform Business Corporation Act – “Fair
Value,” with respect to a dissenter’s shares, means the value of
the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
Value Definitions
5. ∗ A general way of determining a value indication of a
business, business ownership interest, or security
using one or more methods based on the value of the
assets net of liabilities.
Asset Approach
6. ∗ A general way of determining a value indication of a
business, business ownership interest, security, or
intangible asset using one or more methods that
convert anticipated economic benefits into a present
single amount.
Income Approach
7. ∗ Capitalization of Net Cash Flow Method
∗ Capitalization of Earnings Method
∗ Discounted Cash Flow Method
∗ Capitalization of Excess Earnings Method
Income Approach Methods
8. ∗ A general way of determining a value indication of a
business, business ownership interest, security, or
intangible asset using one or more methods that
compare the subject company to similar businesses,
business ownership interest, securities, or intangible
assets that have been sold.
Market Approach
9. ∗ Guideline Company Method
∗ Merger and Acquisition Method
∗ Prior Transactions
∗ Rules of Thumb
Market Approach Methods
10. ∗ Use more than one approach – no single method may
be useful every time.
∗ No valuation at all – convertible debt deals.
∗ Four approaches:
∗ Venture Capital Method
∗ Berkus Method
∗ Scorecard Valuation Method
∗ Risk Factor Summation Method
Early Stage Companies
11. ∗ Value is based on expected rates of return at exit.
∗ Return on Investment (ROI) = Terminal Value / Post-
Money Valuation
∗ Post-Money Valuation = Terminal Value / Anticipated
ROI.
∗ Assumes only one round. If multiple rounds, reduce
the pre-money valuation by the estimated level of
dilution from later investors.
Venture Capital Method
12. ∗ Attributes a range of dollar values to the progress startup
companies have made towards a commercial market.
∗ Each Attribute is worth $500,000 for a Company that has the
potential to reach $20 million in revenue in five years:
∗ Sound Idea (basic value, product risk)
∗ Prototype (reducing technology risk)
∗ Quality Management Team (reducing execution risk)
∗ Strategic Relationships (reducing market and competitive risk)
∗ Product Rollout or Sales (reducing financial or production risk)
Berkus Method
13. ∗ Adjusts the median pre-money valuation for
seed/startup deals in a particular region and in the
business vertical of the target based on seven
characteristics of the company.
Scorecard Valuation Method
14. ∗ Compare the target company to similar deals in the regions
considering the following factors:
∗ Strength of the Management Team – 0%- 30%
∗ Size of the Opportunity – 0% - 25%
∗ Product/Technology – 0% - 15%
∗ Competitive Environment – 0% - 10%
∗ Marketing/Sales Channels/Partnerships – 0% - 10%
∗ Need for Additional Investment – 0% - 5%
∗ Other – 0% - 5%
NOTE: Total must equal 100%
Scorecard Valuation Method
15. ∗ Compares 12 characteristics of the target company to
what might be expected in a fundable seed/startup
company.
∗ Adjusts the average pre-money valuation of pre-
revenue companies in the region.
Risk Factor Summation Method
18. ∗ Each risk is assessed as follows:
∗ +2 – very positive for growing the company and
executing an exit
∗ +1 – positive
∗ 0 – Neutral
∗ -1 – negative for growing the company and executing an
exit
∗ -2 – very negative
Risk Factor Summation Method
20. ∗ Buy-Sell Agreements
∗ Shareholder Agreements
∗ Operating Agreements, Limited Partnership
Agreements, Partnership Agreements
Type of Agreements
21. ∗ Potential Third-Party Sale Triggers
Bona Fide Third-Party Offer
Divorce
Bankruptcy
∗ Viability of Owner Triggers
Disability
Death
∗ Relationship Severance Triggers
Employee-Owner Resigns, Retires, or is Terminated
Triggering Events
22. ∗ Purchase Price Determination
∗ Restrictions on Transfer and Right of First Refusal
∗ Employment and Non-Compete
∗ Call and Put Options
∗ Funding and Terms of Purchase
∗ Preferred Returns, Conversion Rights, and
Participation Rights
Key Provisions
23. ∗ Standard of Value
∗ Level of Value
∗ Valuation Date (known or reasonably knowable
standard, usually tied to triggering event)
∗ Appraiser Qualifications
∗ Governing Standards
∗ Scope of Valuation and Type of Report
Ambiguity of Essential Valuation
Elements
