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Startup Advisor Lunch & Learn Slide Deck
- 1. WEBSITE: SP3NW.ORG SOCIALS: @SP3NW EMAIL:INFO@SP3NW.ORG WEBSITE: AM-CPAS.COM EMAIL: SMARTIN@AM-CPAS.COM
- 2. Valuing Early-Stage Companies andAgreements Your Startup Advisory Board May 26, 2022 Presented by Scott H. Martin, CPA/ABV, ASA Mackenzie Marr, CPA
- 3. โ Fair MarketValue โ 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. โ Investment Value โ The value of a business to a particular buyer based upon a return on investment analysis and the unique circumstances of the transaction. โ Fair Value โ The Uniform Business Corporation Act โ โFair Value,โ with respect to a dissenterโs 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
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- 5. โ A generalway 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. โ A generalway 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. โ Capitalization ofNet Cash Flow Method โ Capitalization of Earnings Method โ Discounted Cash Flow Method โ Capitalization of Excess Earnings Method Income Approach Methods
- 8. โ A generalway 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. โ Guideline CompanyMethod โ Merger and Acquisition Method โ Prior Transactions โ Rules of Thumb Market Approach Methods
- 10. โ Use morethan one approach โ no single method may be useful every time. โ No valuation at all โ convertible debt deals. โ Four approaches: โ Venture Capital Method โ Berkus Method โ Scorecard Valuation Method โ Risk Factor Summation Method Early Stage Companies
- 11. โ Value isbased on expected rates of return at exit. โ Return on Investment (ROI) = Terminal Value / Post- Money Valuation โ Post-Money Valuation = Terminal Value / Anticipated ROI. โ 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. โ Attributes arange of dollar values to the progress startup companies have made towards a commercial market. โ Each Attribute is worth $500,000 for a Company that has the potential to reach $20 million in revenue in five years: โ Sound Idea (basic value, product risk) โ Prototype (reducing technology risk) โ Quality Management Team (reducing execution risk) โ Strategic Relationships (reducing market and competitive risk) โ Product Rollout or Sales (reducing financial or production risk) Berkus Method
- 13. โ Adjusts themedian 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. โ Compare thetarget company to similar deals in the regions considering the following factors: โ Strength of the Management Team โ 0%- 30% โ Size of the Opportunity โ 0% - 25% โ Product/Technology โ 0% - 15% โ Competitive Environment โ 0% - 10% โ Marketing/Sales Channels/Partnerships โ 0% - 10% โ Need for Additional Investment โ 0% - 5% โ Other โ 0% - 5% NOTE: Total must equal 100% Scorecard Valuation Method
- 15. โ Compares 12characteristics of the target company to what might be expected in a fundable seed/startup company. โ Adjusts the average pre-money valuation of pre- revenue companies in the region. Risk Factor Summation Method
- 16. โ Management โ Stageof Business โ Legislation/Political Risk โ Manufacturing Risk โ Sales and Marketing Risk โ Funding/Capital Raising Risk โ Competition Risk โ Technology Risk Risk Factor Summation Method (Factors)
- 17. โ Litigation Risk โInternational Risk โ Reputation Risk โ Potential Lucrative Exit Risk Factor Summation Method (Factors, continued)
- 18. โ Each riskis assessed as follows: โ +2 โ very positive for growing the company and executing an exit โ +1 โ positive โ 0 โ Neutral โ -1 โ negative for growing the company and executing an exit โ -2 โ very negative Risk Factor Summation Method
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- 20. โ Buy-Sell Agreements โShareholder Agreements โ Operating Agreements, Limited Partnership Agreements, Partnership Agreements Type of Agreements
- 21. โ Potential Third-PartySale Triggers ๏ง Bona Fide Third-Party Offer ๏ง Divorce ๏ง Bankruptcy โ Viability of Owner Triggers ๏ง Disability ๏ง Death โ Relationship Severance Triggers ๏ง Employee-Owner Resigns, Retires, or is Terminated Triggering Events
- 22. โ Purchase PriceDetermination โ Restrictions on Transfer and Right of First Refusal โ Employment and Non-Compete โ Call and Put Options โ Funding and Terms of Purchase โ Preferred Returns, Conversion Rights, and Participation Rights Key Provisions
- 23. โ Standard ofValue โ Level of Value โ Valuation Date (known or reasonably knowable standard, usually tied to triggering event) โ Appraiser Qualifications โ Governing Standards โ Scope of Valuation and Type of Report Ambiguity of Essential Valuation Elements
- 24. Phone: 509-323-0272 Email: โ ScottH. Martin - smartin@am-cpas.com โ Mackenzie Marrโ mmarr@am-cpas.com Thank you! Questions?
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