Venture Capital Valuation Case Studies and Methodology

Acknowledgments

Introduction

What You Don't Know About Valuation Will Cost You Money

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 Everyday

Did Valuation Ignorance Cost ConnectU (and the Winklevosses) $50MM?

An Expert Doesn't Need a 409a Valuation When They Have a Certificate and Basic Math

Valuating Facebook's Common Stock Compared to Preferred Stock in Minutes

What the Winklevosses Would Have Seen in Any 409a Valuation Report

Deriving a Discount for Lack of Marketability for Valuations

Facebook at $80 Billion Valuation versus Enron at $80 Billion Valuation

Deal Terms, Waterfalls and the Pre-money Myth

The Pre-Money Myth

Summary

Chapter 2 Should Venture Backed Companies Even Consider A DCF Model?

Introducing the Life Science Valuation Case: Zogenix

Zogenix: Company Background Summary and Highlights

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

Order of Valuations Presented In This Case

Chapter 3 Valuation Methods versus Allocation Methods regarding Zogenix

Separating Enterprise Value from the Allocation of That Value

Valuing Total Equity

Using Future Value (FV) and Present Value (PV) To Value Future Cash Flows Today

Summary

Chapter 4 Applying the Typical DCF Model to a Venture Backed Company Hardly Ever Works

The Gordon Growth Model

High Growth Limits the Gordon Growth Model

Dividend Irrelevance and Capital Structure Irrelevance

Using Comparables (Generally Market Multiples) to Generate a Terminal Value

Actual Differences between Angels and VCs versus Perceived Differences

Applying Valuation Methods and Allocation Methods at Inception

Summary

Chapter 5 “Enterprise Value” + “Allocation Methods” = Value Destruction

Undervaluing Companies and Overvaluing Employee Options

Most 409a Valuations Undervalue the Company and Simultaneously Overvalue Employee Stock Options

Did Auditors Drive Valuators to Overvalue Employee Stock Options?

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

The Realistic Range of Possibilities Depends on Who the Investors Are

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

What Happens To Fund IRRs When You Assume Book Value Equals Market Value?

The Real Cost of Fair Value, Fair Market Value, and Enterprise Value

Yahoo! Case

Chapter 6 Why You Should D.O.W.T. (Doubt) Venture Capital Returns -- Option Pool Reserve

Unissued Option Pools

Value Conclusion Elements Impacted by Option Pool Reserve Assumptions

Impact on Parties Relying on Assumptions of VC Investments

Chapter 7 If Valuation Can't Make You Money, Do You Really Need It?

Learning Practical Applications from Kayak.com

Applying Studies to Real-World Cases

Important Questions to Ask

Summary

Chapter 8 Don't Hate the Appraiser (Blame the Auditor Instead)

Interview with Jeff Faust, AVA

Summary

Chapter 9 Don't Blame the Auditors (Blame the Practice Aid Instead)

409a Valuation Professionals Discussing Topic 820 (FAS157) with VC CFOs

Introduction to the Expert Panelists

The Auditor's Valuation “Bible”

SAS101 Tests, PWERMS and OPMs

PWERMS and rNPV/eNPV Models

Subjectivity and the PWERM (or “POWER” Method

Finding Inputs For The OPM Model

Enterprise Values Versus Allocations

Next Round Pricing And Topic 820

Granted, Unvested and Reserved Options – Different Ways of Treating

Valuing Warrants in Venture Backed Companies

Quantifying Qualitative Inputs to Value Conclusions For VC Funded Companies

Discounts for Lack of Marketability (DLOM) and Venture Fund Portfolios

Sharespost, SecondMarket as Market Inputs

Summary

Chapter 10 Now That You Understand Venture Capital Valuation, Share It

About the Author

Index