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Venture Capital Valuation, + Website: Case Studies and Methodology / Edition 1

Venture Capital Valuation, + Website: Case Studies and Methodology / Edition 1

by Lorenzo Carver


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Venture Capital Valuation, + Website: Case Studies and Methodology / Edition 1

Real-world case studies clarify valuation principles to helpreaders maximize returns

When founders, VCs, angels, attorneys, CFOs, CEOs, and employeesdon't understand the true meanings of "value" and "valuation," theyend up losing money—lots of money. Venture Capital Valuationis for anyone involved in a venture capital- orangel-backedprivate company who wants to get the most out of their investmentsby controlling one of the few things they can when dealing withhigh-velocity, risky investments: their understanding ofvaluation.

Lorenzo Carver, author and developer of the #1 selling,award-winning small-business valuation solution software, shareshis decades of experience simplifying the high-growth companyvaluation process for clients in every business sector. Anchored byscores of high-profile examples, Venture Capital Valuation deftlyillustrates how stakeholders in a given startup or high-growthcompany could have improved their outcomes by having betterinformation about valuation.

Helping readers answer such vital valuation questions as "What'sthis company worth?" "Is this a fair valuation?" and "Are weleaving too much money on the table?" Venture Capital Valuationdissects the valuation profiles of some of today's leadingcorporations, including:

  • Facebook

  • Twitter

  • LinkedIn

  • Microsoft

  • Yahoo!


  • Zogenix

  • Plus, interviews with venture-backed company valuation expertsJeff Faust, Josh Cashman, and Joe Orlando

A companion website allows readers to access and downloadadditional material mentioned throughout the text.

Don't wait until it's too late. Learn how "value" changes rightsto cash flow at every stage of a company's evolution with VentureCapital Valuation.

Product Details

ISBN-13: 9780470908280
Publisher: Wiley
Publication date: 12/27/2011
Series: Wiley Finance Series , #631
Pages: 288
Product dimensions: 6.20(w) x 9.10(h) x 1.20(d)

About the Author

Lorenzo Carver, MS, MBA, CVA, CPA, is CEO of Liquid Scenarios, atechnology-based financial business intelligence solution companythat provides services to investors, practitioners, entrepreneurs,and academics on how to measure and realize high-growth venturevalue. Carver has a twenty-year track record of helping thousandsof clients understand how to measure and realize high-growthventure value. He is the author and developer of BallPark BusinessValuation, the #1 selling, award-winning small-business valuationsolution software covered by Bloomberg Businessweek, Entrepreneur,CPA Software News, The Kim Komando Show, and business journalsworldwide.

Table of Contents

Acknowledgments ix

Introduction What You Don’t Know About Valuation Will CostYou Money 1

Chapter 1 Using Facebook, Twitter, and LinkedIn to Explain VCValuation Gains and Losses: How VCs, Angels, Founders, andEmployees 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 Hasa Certificate and Basic Math 15

Valuing Facebook’s Common Stock Compared to PreferredStock in Minutes 16

What the Winklevosses Would Have Seen in Any 409A ValuationReport 19

Deriving a Discount for Lack of Marketability for Valuations27

Facebook at $80 Billion Valuation versus Enron at $80 BillionValuation 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 DCFModel?: Introducing the Life Science Valuation Case: Zogenix57

Zogenix: Company Background Summary and Highlights 58

Leaping Forward Just 20 Months, the Company Files for an IPO64

Order of Valuations Presented in This Case 67

Chapter 3 Valuation Methods versus Allocation Methods RegardingZogenix 69

Separating Enterprise Value from the Allocation of That Value69

Valuing Total Equity 72

Using Future Value (FV) and Present Value (PV) to Value FutureCash Flows Today 79

Summary 82

Chapter 4 Applying the Typical DCF Model to a Venture-BackedCompany 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 aTerminal Value 91

Actual Differences between Angels and VCs versus PerceivedDifferences 100

Applying Valuation Methods and Allocation Methods at Inception102

Summary 104

Chapter 5 “Enterprise Value” +“Allocation Methods” = Value Destruction: UndervaluingCompanies and Overvaluing Employee Options 107

Most 409A Valuations Undervalue the Company and SimultaneouslyOvervalue Employee Stock Options 107

Did Auditors Drive Valuators to Overvalue Employee StockOptions? 109

Most 409A Enterprise Value Calculations Ignore the“Takeover” Value of Preferred 113

The Realistic Range of Possibilities Depends on Who theInvestors Are 119

Overstating Returns and Understating Returns on the Same Asset(Simultaneously) 125

What Happens to Fund IRRs When You Assume Book Value EqualsMarket Value? 128

The Real Cost of Fair Value, Fair Market Value, and EnterpriseValue 132

Yahoo! Case 137

Chapter 6 Why You Should D.O.W.T. (Doubt) Venture CapitalReturns—Option Pool Reserve 159

Unissued Option Pools 159

Value Conclusion Elements Impacted by Option Pool ReserveAssumptions 161

Impact on Parties Relying on Assumptions of VC Investments176

Chapter 7 If Valuation Can’t Make You Money, Do YouReally Need It?: Learning Practical Applications from Kayak.com183

Applying Studies to Real-World Cases 186

Important Questions to Ask 213

Summary 223

Chapter 8 Don’t Hate the Appraiser (Blame the AuditorInstead) 225

Interview with Jeff Faust, AVA 226

Summary 236

Chapter 9 Don’t Blame the Auditors (Blame the PracticeAid 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”) Method243

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 ReservedOptions 250

Valuing Warrants in Venture-Backed Companies 252

Quantifying Qualitative Inputs to Value Conclusions forVC-Funded Companies 253

Discounts for Lack of Marketability (DLOM) and Venture-FundPortfolios 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

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