Venture Capital Valuation: Case Studies and Methodology + Website

Real–world case studies clarify valuation principles to help readers maximize returns When founders, VCs, angels, attorneys, CFOs, CEOs, and employees don′t understand the true meanings of "value" and "valuation," they end up losing money—lots of money. Venture Capital Valuation is for anyone involved in a venture capital– or angel–backed private company who wants to get the most out of their investments by controlling one of the few things they can when dealing with high–velocity, risky investments: their understanding of valuation. Lorenzo Carver, author and developer of the #1 selling, award–winning small–business valuation solution software, shares his decades of experience simplifying the high–growth company valuation process for clients in every business sector. Anchored by scores of high–profile examples, Venture Capital Valuation deftly illustrates how stakeholders in a given startup or high–growth company could have improved their outcomes by having better information about valuation. Helping readers answer such vital valuation questions as "What′s this company worth?" "Is this a fair valuation?" and "Are we leaving too much money on the table?" Venture Capital Valuation dissects the valuation profiles of some of today′s leading corporations, including: Facebook Twitter LinkedIn Microsoft Yahoo! Kayak.com Zogenix Plus, interviews with venture–backed company valuation experts Jeff Faust, Josh Cashman, and Joe Orlando A companion website allows readers to access and download additional material mentioned throughout the text. Don′t wait until it′s too late. Learn how "value" changes rights to cash flow at every stage of a company′s evolution with Venture Capital Valuation.

Acknowledgments ix Introduction What You Don’t Know About Valuation Will Cost You Money 1 Chapter 1 Using Facebook, Twitter, and LinkedIn to Explain VC Valuation Gains and Losses: How VCs, Angels, Founders, and Employees Give Up Investment Cash Flow Every Day 13 Did Valuation Ignorance Cost ConnectU (and the Winklevosses) $50MM? 14 An Expert Doesn’t Need a 409A Valuation When He or She Has a Certificate and Basic Math 15 Valuing Facebook’s Common Stock Compared to Preferred Stock in Minutes 16 What the Winklevosses Would Have Seen in Any 409A Valuation Report 19 Deriving a Discount for Lack of Marketability for Valuations 27 Facebook at $80 Billion Valuation versus Enron at $80 Billion Valuation 35 Deal Terms, Waterfalls, and the Pre–Money Myth 36 The Pre–Money Myth 44 Summary 56 Chapter 2 Should Venture–Backed Companies Even Consider a DCF Model?: Introducing the Life Science Valuation Case: Zogenix 57 Zogenix: Company Background Summary and Highlights 58 Leaping Forward Just 20 Months, the Company Files for an IPO 64 Order of Valuations Presented in This Case 67 Chapter 3 Valuation Methods versus Allocation Methods Regarding Zogenix 69 Separating Enterprise Value from the Allocation of That Value 69 Valuing Total Equity 72 Using Future Value (FV) and Present Value (PV) to Value Future Cash Flows Today 79 Summary 82 Chapter 4 Applying the Typical DCF Model to a Venture–Backed Company Hardly Ever Works 85 The Gordon Growth Model 85 High Growth Limits the Gordon Growth Model 87 Dividend Irrelevance and Capital Structure Irrelevance 90 Using Comparables (Generally Market Multiples) to Generate a Terminal Value 91 Actual Differences between Angels and VCs versus Perceived Differences 100 Applying Valuation Methods and Allocation Methods at Inception 102 Summary 104 Chapter 5 “Enterprise Value” + “Allocation Methods” = Value Destruction: Undervaluing Companies and Overvaluing Employee Options 107 Most 409A Valuations Undervalue the Company and Simultaneously Overvalue Employee Stock Options 107 Did Auditors Drive Valuators to Overvalue Employee Stock Options? 109 Most 409A Enterprise Value Calculations Ignore the “Takeover” Value of Preferred 113 The Realistic Range of Possibilities Depends on Who the Investors Are 119 Overstating Returns and Understating Returns on the Same Asset (Simultaneously) 125 What Happens to Fund IRRs When You Assume Book Value Equals Market Value? 128 The Real Cost of Fair Value, Fair Market Value, and Enterprise Value 132 Yahoo! Case 137 Chapter 6 Why You Should D.O.W.T. (Doubt) Venture Capital Returns—Option Pool Reserve 159 Unissued Option Pools 159 Value Conclusion Elements Impacted by Option Pool Reserve Assumptions 161 Impact on Parties Relying on Assumptions of VC Investments 176 Chapter 7 If Valuation Can’t Make You Money, Do You Really Need It?: Learning Practical Applications from Kayak.com 183 Applying Studies to Real–World Cases 186 Important Questions to Ask 213 Summary 223 Chapter 8 Don’t Hate the Appraiser (Blame the Auditor Instead) 225 Interview with Jeff Faust, AVA 226 Summary 236 Chapter 9 Don’t Blame the Auditors (Blame the Practice Aid Instead): 409A Valuation Professionals Discussing Topic 820 (FAS 157) with VC CFOs 237 Introduction to the Expert Panelists 238 The Auditor’s Valuation “Bible” 239 SAS101 Tests, PWERMS, and OPMs 240 PWERMS and rNPV/eNPV Models 243 Subjectivity and the PWERM (or “Power”) Method 243 Finding Inputs for the OPM Model 245 Enterprise Values versus Allocations 246 Next Round Pricing and Topic 820 248 Different Ways of Treating Granted, Unvested, and Reserved Options 250 Valuing Warrants in Venture–Backed Companies 252 Quantifying Qualitative Inputs to Value Conclusions for VC–Funded Companies 253 Discounts for Lack of Marketability (DLOM) and Venture–Fund Portfolios 254 Sharespost, SecondMarket as Market Inputs 258 Summary 262 Chapter 10 Now That You Understand Venture Capital Valuation, Share It 263 About the Author 269 Index 271

Lorenzo Carver, MS, MBA, CVA, CPA, is CEO of Liquid Scenarios, a technology–based financial business intelligence solution company that provides services to investors, practitioners, entrepreneurs, and academics on how to measure and realize high–growth venture value. Carver has a twenty–year track record of helping thousands of clients understand how to measure and realize high–growth venture value. He is the author and developer of BallPark Business Valuation, the #1 selling, award–winning small–business valuation solution software covered by Bloomberg Businessweek, Entrepreneur, CPA Software News, The Kim Komando Show, and business journals worldwide.