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Valuing Early Stage and Venture-Backed Companies
Neil J. Beaton (Author)
9780470436295, Wiley
Hardback, published 16 April 2010
224 pages
25.7 x 18 x 2.3 cm, 0.476 kg
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: 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.
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
Subject Areas: Finance & accounting [KF]
