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Valuing Early Stage and Venture-Backed Companies. Edition No. 1. Wiley Finance

  • ID: 2211245
  • Book
  • April 2010
  • 224 Pages
  • John Wiley and Sons Ltd
Valuing Early Stage and Venture-Backed Companies

Unique in the overall sphere of business valuation, the valuing of early stage and venture-backed companies lacks the traditional metrics of cash flow, earnings, or even revenue at times. But without these metrics, traditional discounted cash flow models and comparison to public markets or private transactions take on less relevance, calling for a more "experiential" valuation approach.

In a straightforward, no-nonsense manner, the mystique surrounding the valuation of early stage and venture-backed companies is now unveiled. With an emphasis on applications and models, Valuing Early Stage and Venture-Backed Companies shows the most effective way for your company to prepare and present its valuations.

Featuring contributed chapters by a panel of top valuation experts, this book dispels improper valuation techniques promulgated by unknowing business appraisers and answers your key questions about valuation theory and which tools you need to successfully apply in your specific situation.

Here, you'll find out more about various valuation techniques, including: - "Back solving" valuation - Modified cost approach - Option pricing model - Probability-weighted expected returns model - Asian puts - New data on discounts for lack of marketability

Detailed and hands-on, Valuing Early Stage and Venture-Backed Companies equips you with broad foundational data on the venture capital industry, as well as in-depth analyses of distinct early stage company valuation approaches.

Performing valuations for your early stage company requires an understanding of the special circumstances faced by your organization. With ample examples of generally accepted allocation models with complex capital structures common to early stage companies, Valuing Early Stage and Venture-Backed Companies mixes real-life experience with deep technical expertise to equip you with the complete, user-friendly resource you'll turn to often in valuing your early stage or venture-backed company.
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Preface ix

Acknowledgments xi

About the Author xiii

CHAPTER 1 Laying the Foundation 1

A Unique Landscape 1

An Overview of the Venture Capital Industry 8

Conclusion 14

CHAPTER 2 Understanding Early Stage Preferred Stock Rights 17

Stock Rights 19

Contractual Rights 28

Conclusion 32

CHAPTER 3 Enterprise Valuation Approaches 35

Relevancy of Traditional Valuation Approaches 35

Cost Approach 40

Market Approach 43

Income Approach 45

“Vectoring” Valuation Approach 46

The Income Approach as an Oxymoron 53

Conclusion 58

CHAPTER 4 Application of the Option-Pricing Method in Allocating Enterprise Value 59

Important Assumptions Underlying the Option-Pricing Model 61

Option-Pricing Method Steps in Application 66

Other Considerations in the Option-Pricing Method 86

Pros and Cons of the Option-Pricing Model 87

Conclusion 88

CHAPTER 5 Application of the Probability-Weighted Expected Returns Method in Allocating Enterprise Value 89

Illustration of the PWERM 90

PWERM Critical Assumptions 94

Overview of Stock Rights 96

Identification of Outcomes 98

Updating PWERM Analyses 104

Conclusion 105

CHAPTER 6 Applicable Discounts for Early Stage Companies 107

Basis of Discounts 108

Suggested “Corrections” to the Current Use of Put Models for Quantifying DLOMs 114

Dilution Discount 119

The Likelihood of Liquidity 120

Conclusion 123

CHAPTER 7 Advanced Valuation Topics for Early Stage Companies 125

Utilizing the OPM as a “Valuation” Methodology 127

Sequential and Compound Options 127

Allocating the Residual Value 131

Further Extensions for Compound Options 137

Venture Capital Rates of Return 139

Executive Stock Compensation 143

Conclusion 143

APPENDIX A Allocation of Enterprise Value Using the Option-Pricing Method: Treatment of Derivatives on Common Stock 145

APPENDIX B Volatility in the Option-Pricing Model 155

Notes 175

Index 179

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Neil J. Beaton
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