Venture Capital Valuation – Case Studies and Methodology +WS

Acknowledgments ix
<p>Introduction What You Don t Know About Valuation Will Cost You Money 1</p>
<p>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</p>
<p>Did Valuation Ignorance Cost ConnectU (and the Winklevosses) $50MM? 14</p>
<p>An Expert Doesn t Need a 409A Valuation When He or She Has a Certificate and Basic Math 15</p>
<p>Valuing Facebook s Common Stock Compared to Preferred Stock in Minutes 16</p>
<p>What the Winklevosses Would Have Seen in Any 409A Valuation Report 19</p>
<p>Deriving a Discount for Lack of Marketability for Valuations 27</p>
<p>Facebook at $80 Billion Valuation versus Enron at $80 Billion Valuation 35</p>
<p>Deal Terms, Waterfalls, and the Pre–Money Myth 36</p>
<p>The Pre–Money Myth 44</p>
<p>Summary 56</p>
<p>Chapter 2 Should Venture–Backed Companies Even Consider a DCF Model?: Introducing the Life Science Valuation Case: Zogenix 57</p>
<p>Zogenix: Company Background Summary and Highlights 58</p>
<p>Leaping Forward Just 20 Months, the Company Files for an IPO 64</p>
<p>Order of Valuations Presented in This Case 67</p>
<p>Chapter 3 Valuation Methods versus Allocation Methods Regarding Zogenix 69</p>
<p>Separating Enterprise Value from the Allocation of That Value 69</p>
<p>Valuing Total Equity 72</p>
<p>Using Future Value (FV) and Present Value (PV) to Value Future Cash Flows Today 79</p>
<p>Summary 82</p>
<p>Chapter 4 Applying the Typical DCF Model to a Venture–Backed Company Hardly Ever Works 85</p>
<p>The Gordon Growth Model 85</p>
<p>High Growth Limits the Gordon Growth Model 87</p>
<p>Dividend Irrelevance and Capital Structure Irrelevance 90</p>
<p>Using Comparables (Generally Market Multiples) to Generate a Terminal Value 91</p>
<p>Actual Differences between Angels and VCs versus Perceived Differences 100</p>
<p>Applying Valuation Methods and Allocation Methods at Inception 102</p>
<p>Summary 104</p>
<p>Chapter 5 Enterprise Value + Allocation Methods = Value Destruction: Undervaluing Companies and Overvaluing Employee Options 107</p>
<p>Most 409A Valuations Undervalue the Company and Simultaneously Overvalue Employee Stock Options 107</p>
<p>Did Auditors Drive Valuators to Overvalue Employee Stock Options? 109</p>
<p>Most 409A Enterprise Value Calculations Ignore the Takeover Value of Preferred 113</p>
<p>The Realistic Range of Possibilities Depends on Who the Investors Are 119</p>
<p>Overstating Returns and Understating Returns on the Same Asset (Simultaneously) 125</p>
<p>What Happens to Fund IRRs When You Assume Book Value Equals Market Value? 128</p>
<p>The Real Cost of Fair Value, Fair Market Value, and Enterprise Value 132</p>
<p>Yahoo! Case 137</p>
<p>Chapter 6 Why You Should D.O.W.T. (Doubt) Venture Capital Returns Option Pool Reserve 159</p>
<p>Unissued Option Pools 159</p>
<p>Value Conclusion Elements Impacted by Option Pool Reserve Assumptions 161</p>
<p>Impact on Parties Relying on Assumptions of VC Investments 176</p>
<p>Chapter 7 If Valuation Can t Make You Money, Do You Really Need It?: Learning Practical Applications from Kayak.com 183</p>
<p>Applying Studies to Real–World Cases 186</p>
<p>Important Questions to Ask 213</p>
<p>Summary 223</p>
<p>Chapter 8 Don t Hate the Appraiser (Blame the Auditor Instead) 225</p>
<p>Interview with Jeff Faust, AVA 226</p>
<p>Summary 236</p>
<p>Chapter 9 Don t Blame the Auditors (Blame the Practice Aid Instead): 409A Valuation Professionals Discussing Topic 820 (FAS 157) with VC CFOs 237</p>
<p>Introduction to the Expert Panelists 238</p>
<p>The Auditor s Valuation Bible 239</p>
<p>SAS101 Tests, PWERMS, and OPMs 240</p>
<p>PWERMS and rNPV/eNPV Models 243</p>
<p>Subjectivity and the PWERM (or Power ) Method 243</p>
<p>Finding Inputs for the OPM Model 245</p>
<p>Enterprise Values versus Allocations 246</p>
<p>Next Round Pricing and Topic 820 248</p>
<p>Different Ways of Treating Granted, Unvested, and Reserved Options 250</p>
<p>Valuing Warrants in Venture–Backed Companies 252</p>
<p>Quantifying Qualitative Inputs to Value Conclusions for VC–Funded Companies 253</p>
<p>Discounts for Lack of Marketability (DLOM) and Venture–Fund Portfolios 254</p>
<p>Sharespost, SecondMarket as Market Inputs 258</p>
<p>Summary 262</p>
<p>Chapter 10 Now That You Understand Venture Capital Valuation, Share It 263</p>
<p>About the Author 269</p>
<p>Index 271</p>