Alicia Valuation Presentation 04-29-13
f 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
2. Today’s
Speakers
• Managing
Director,
Scalar
Analy8cs
• Visi8ng
Professor,
Clark
University
and
Tu@s
University
• CPA
and
CVA
• Prior
CFO
Scalar
Analy*cs
specializes
in
business
valua*ons
including
409A
valua*ons.
• CPA,
Wolf
&
Company
• Accoun8ng
and
audi8ng
• Leads
the
High
Tech
prac8ce
• BOD
and
program
chair
commiJee
at
TCN
Wolf
&
Company,
PC,
is
a
100
year
old
regional
firm
with
19
owners
and
185
professionals,
focused
on
CPA
core
competencies
with
a
dedicated
tech
services
team.
ScoJ
Goodwin
Alicia
Amaral
3. About
Scalar
Analy8cs
• Collabora8ve
approach
• 550
valua8ons
per
year
(50%
are
409A)
• Majority
of
clients
backed
by
venture
capital
firms
and
angel
groups
• Clients
in
virtually
every
industry
• Work
with
all
of
the
“big
4”
audit
firms
and
countless
regional
firms
5. Standard
of
Value
• Fair
Market
Value
• Rev.
Rule
59-‐60
“The
price
at
which
the
property
would
change
hands
between
a
willing
buyer
and
a
willing
seller,
neither
being
under
any
compulsion
to
buy
or
sell,
and
both
having
reasonable
knowledge
of
relevant
facts.”
• Important
because
this
does
not
assume
a
strategic
buyer.
• This
is
the
standard
for
409A
6. Standard
of
Value,
con’t
• Investment
Value
• “The
value
to
a
par8cular
investor
based
on
individual
investment
requirements
and
expecta8ons”
• Value
is
different
depending
on
synergies
• Applies
to
specific
buyer
rather
than
hypothe8cal
buyer
• 409A
≠
VC
or
angel
investment
7. Standard
of
Value,
con’t
• Intrinsic
Value
• Based
on
present
value
of
future
dividends
• Applies
to
public
companies
• Fair
Value
• SFAS
141
and
142
“The
amount
at
which
an
asset
(or
liability)
could
be
bought
or
sold
in
a
current
transac8on
between
willing
par8es.”
• May
include
synergies
9. 1.
Asset
Approach
• Applicable
only
for
companies
in
early
stage
(difficult
to
defend,
last
resort
if
there
are
no
other
data
points)
• The
Asset
Approach
establishes
value
based
on
the
cost
of
reproducing
or
replacing
the
property,
less
deprecia8on.
• Applied
to
specific
assets,
such
as
land
improvements,
special-‐purpose
buildings,
special
structures,
systems,
special
machinery
and
equipment,
and
certain
intangible
assets.
10. 2.
Market
Approach
• Based
on
the
assump8on
that
the
value
of
an
asset
(including
a
company)
is
equal
to
the
value
of
a
subs8tute
asset
with
the
same
characteris8cs.
• Infer
value
by
finding
similar
assets
that
have
been
sold
in
recent
transac8ons.
11. 2.
Market
Approach
a) Recent
securi8es
transac8ons
method
b) Comparable
(guideline)
public
company
method
c) Comparable
transac8on
method
d)
Industry-‐specific
mul8ples
12. 2.
Market
Approach
a) Recent
securi5es
transac5on
method.
Based
on
recent
transac8ons
of
company’s
securi8es
Ex:
preferred
stock
sold
to
angels.
Exhibit
B
(backsolve
method).
Uses
OPM
based
on
preferred
rights
b) Comparable
public
co.
M&A
data
in
company’s
industry.
See
page
20.
Compare
to
Salesforce,
etc.
Uses
revenue
mul8ples,
EBITDA
mul8ples,
etc
c) Comparable
transac5on
method.
See
pg
21.
Similar
to
b)
See
Exhibit
F.
Why
it’s
important
to
review
your
report.
d) Industry
specific
mul8ples
(N/A).
Ex:
headcount,
backlog,
revenue
per
employee,
#
of
customers,
#
of
users
13. 3.
Income
Approach
• Discounted
Cash
Flows
(DCF)
• Present
value
of
future
cash
flows
• Discount
rate
is
based
on
rela8ve
riskiness
of
investment
• See
page
51
for
required
rates
of
return
for
private
venture
backed
companies
14. Enterprise
Value
• Each
method
comes
up
with
different
value
of
the
enterprise
• Analyst
determines
which
are
appropriate
and
weights
them
to
come
up
with
es8mated
enterprise
value
• See
page
22
of
Venture
Co.
15. Alloca8on
Methods
• The
previous
methods
determine
an
enterprise
value
of
the
company
as
a
whole
• The
next
step
is
to
allocate
among
various
classes
of
equity
• Example
(page
22):
Enterprise
value
$48,153,573
Less
Debt
($1,750,000)
Equity
value
=
$46,403,573
16. Breakpoints
• Simply
means
“who
gets
what”
in
the
event
of
an
exit
• Remember
that
the
point
of
a
409A
is
to
value
common
stock
• Preferred
shareholders
get
paid
first
• Common
shareholders
get
what’s
le@
over
• Enterprise
value
is
the
value
today
• Exit
is
value
in
X#
of
years
17. Alloca8on
Methods
• Current
Value
Method
(“CVM”)
–
assumes
value
today
is
same
as
exit
value
– Appropriate
only
if
liquidity
value
is
known
as
in
a
pending
deal
• Probability
Weighted
Expected
Return
(“PWERM”)
–
weighted
average
of
various
scenarios
based
on
probability
(IPO,
sale,
bankruptcy)
– Probability
based
on
appraiser’s
judgment
• Op8on
Pricing
Method
(“OPM”)
–
same
logic
as
PWERM
but
considers
more
scenarios
– Probability
based
on
Black
Scholes
18. OPM
• In
the
event
of
an
exit,
preferred
gets
paid
first
• Common
only
gets
if
there’s
anything
le@
over
• Vola8lity
and
8me
to
liquidity
are
important
factors
in
determining
range
of
outcomes
• Greater
vola8lity
is
beJer
for
common
(lower
lows
but
who
cares
because
below
zero
is
same
as
zero)
• Longer
life
is
beJer
because
more
opportunity
to
grow
19. OPM
• See
Exhibit
M
Breakpoint
Analysis
• Common
stock
only
has
value
only
if
funds
available
exceed
liquida8on
preferences
of
preferred
• See
also
Capshare
Demo
Company
20. Discount
• Discount
for
lack
of
marketability
(DLOM)
25
–
45%
• Discount
for
Venture
Co.
=
35.7%
21. Valua8on
Summary
• Value
is
based
on
a
number
of
assump8ons
that
have
a
material
impact
on
the
result
– Projected
cash
flows
– WACC
– DLOM
– Comparable
companies
• Important
to
have
a
“DEFENDABLE
VALUE”
(IRS
and
auditors)
• Important
to
review
report
for
reasonableness
of
assump8ons.
You
know
your
business.