If you are a CEO or a CFO of a high growth startup, it is vital to understand how to value your company correctly. Here is a quick list of questions this lunch will help you answer: Do you offer or are you planning to offer your employees stock options? Do you know the difference between ISOs and non-ISOs? Do you understand the general valuation concepts and approaches that the IRS has outlined, especially as they apply to early-stage companies? Did you know that if you run afoul of the 409A rules, your employees could have an unpleasant tax surprise and that some of that responsibility could revert back to you as the employer? Do you know if and when you need to engage an outside expert to assist with a valuation? This is a limited seat lunch to teach issues of valuation for equity compensation and ask specific questions about your company. Experts: - Alicia Amaral, Scalar Analytics - Scott Goodwin, Wolf & Company

1. MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS © 2010 Wolf & Company, P.C.
Know
Your
Valua,on
For
Equity
Compensa,on
(and
Avoid
the
Perils
of
409A)
Exclusively
for

2. 2
Introduc,ons
• ScoH
Goodwin
–
Wolf
&
Company,
PC
– Member
of
the
Firm
– Technology
Services
Team
Leader
– TCN
board
of
directors
and
program
commiHee
chair
• Alicia
Amaral
–
Scalar
Analy,cs
– Managing
Director
– TuUs
University,
Entrepreneurial
Finance
– CPA
and
Cer,fied
Valua,on
Analyst,
CVA
– Past
CFO

3. 3
Who
is
Wolf
&
Company?
• Boston
based,
regionally
focused
• 18
owners
and
190
professionals
in
three
offices
• Niche
focused
– Technology
Services
Team
• Provide
our
clients
with
direct
access
to
owner-­‐level
exper,se
• Ability
to
grow
with
you

4. 4
Who
is
Scalar
Analy,cs?
• 600+
valua,ons
per
year
• Majority
of
clients
backed
by
venture
capital
firms
and
angel
groups
• Clients
in
virtually
every
industry
• Work
with
all
of
the
“big
4”
audit
firms
and
countless
regional
firms

5. 5
Agenda
• Overview
of
stock
compensa,on
plans
• Overview
of
IRC
Sec,on
409A
• The
who,
what,
why
and
how
of
valua,ons
• Q&A

6. 6
Stock
Compensa,on
Overview
• Common
forms
of
stock
compensa,on
– Founders
shares
– Op,ons
– Restricted
stock
• Tax
treatment
• Advantages
and
disadvantages

7. 7
Overview
of
IRC
Sec,on
409A
• What
is
it?
• How
does
it
impact
stock
compensa,on?
• What
is
the
worst
that
could
happen?
• What
do
you
as
an
entrepreneur
need
to
know
to
stay
out
of
trouble?
• What
are
best
prac,ces
at
various
stages
of
development?

8. Standard
of
Value
• Fair
Market
Value
– Assumes
hypothe,cal
buyer
– This
is
standard
for
409A
(per
IRS)
• Investment
Value
– Assumes
strategic
buyer
409A
≠
VC
investment
8

9. Investment
Valua,on
for
Start-­‐Ups
• Discounted
Cash
Flow???
• Berkus
• Bill
Payne
Method
• Risk
Factor
Simulation
• Venture
Capital
Method
9

10. David
Berkus
Method
10
$500k
for
each
• Good
idea
• Prototype
• Quality
Team
• Quality
Board
• Ini,al
Sale
Value
$0
to
$2.5
Million

11. Bill
Payne
Method
Factor
Management
Size
of
Opportunity/Market
Product/Service
Sales
Channels
Stage
of
Business
Other
11
Weight
30%
25%
10%
10%
10%
15%
100%
Ra,ng
100
=
Average,
100+
=
above
average,
100-­‐
=
below
Mul,ply
result
by
$1.75M

12. Bill
Payne
Method
Example
Factor
Management
Size
of
Opportunity
Product/Service
Sales
Channels
Stage
of
Business
Other
12
Weight
30%
25%
10%
10%
10%
15%
100%
Ra<ng
125
115
110
70
125
80
Total
37.50
28.75
11.00
7.00
12.50
12.00
108.75
Value
=
$1.75M
*
108.75
=
$1,903,125

13. Risk
Factor
Simula,on
Method
Risk
Factor
Management
Stage
Funding
Risk
Regulatory
Manufacturing
Sales
&
Mktg
Compe,,on
Technology
Li,ga,on
Reputa,onal
Exit
13
Risk
Factor
+$500k
+$250k
-­‐$250k
0
+$250k
-­‐$500k
+$250k
+$250k
$0
-­‐$250k
+$250k
$250k
Valua<on
Base
$1.75M
Risk
250k
Value
$2.0M

14. Venture
Capital
Method
Determine
the
• Investor’s
required
rate
of
return
(ROI),
and
• Terminal
Value
(TV)
Work
backwards
to
get
valua,on
(Post
$)
TV
can
be
either
exit
or
next
round
14

15. VC
Method
Example
• TV
based
on
es,mated
revenues
and/or
Net
Income
in
terminal
year
• Example:
– Es,mated
revenue
in
Year
5
is
$40M
– Average
mul,plier
for
industry
=
2
– So
your
es,mated
value
of
the
company
at
the
end
of
year
5
,
or
TV
=
$40M
*
2
=
$80M
*Note:
Can
also
es,mate
TV
based
on
Net
Income
and
apply
average
P/E
mul,ples
15

16. VC
Method
Example
• ROI
• Say
I
sell
an
investment
for
$100M
that
I
purchased
for
$20M.
What’s
my
ROI?
• Answer:
$100M
/
20M
=
5x
• Same
as
TV/Post$
=
ROI
• To
solve
for
Post$:
Post$
=
TV/ROI
16

17. VC
Method
Example
• Say
in
our
example
that
investor
needs
a
20X
ROI
• Post
$
=
TV/ROI
• Post
$
=
$80M
/
20
• Post
$
=
$4,000,000
17

18. Three
Valua,on
Methods
Valua,on
Methods
409A
1. Asset
Approach
2. Market
Approach
3. Income
Approach
18

19. 2.
Market
Approach
a) Recent
securi,es
transac,ons
method
b) Comparable
(guideline)
public
company
method
c) Comparable
transac,on
method
d) Industry-­‐specific
mul,ples
19

20. 2b.
Market
Example:
Guideline
Public
Company
Method
Data
for
similar
public
companies
in
same
industry
• Salesforce.com,
Inc.
• Concur
Technologies,
Inc.
• Kenexa
Corp.
• LogMeIn,
Inc.
• Constant
Contact,
Inc.
20
In
thousands
of
dollars
(000) LTM
Revenue LTM
EBITDA NTM
Revenue NTM
EBITDA
Venture
Co. $6,812.0 ($6,337.8) $14,380.7 ($3,166.6)
Mean
Multiple 5.0x 22.1x 4.0x 19.2x
Implied
Enterprise
Value $33,809.2 N/A
$57,270.2 N/A
Average
Enterprise
Value $45,539.7
Plus
Cash $4,441.9
Market
Value
of
Invested
Capital $49,981.6

21. Steps
in
the
Valua,on
Process
1. Take
weighted
average
of
applicable
methods
(asset,
market
or
income)
to
come
up
with
enterprise
value
2. Allocate
the
enterprise
value
among
classes
of
stock
21

22. Valuation
7
Step 1 – Determine enterprise value using weighted
average of applicable methods (Asset, Market and Income)
Fair
Market
Value
of
Venture
Co.
as
of
September
30,
2012 Market
Value
of Method Weighted
In
actual
dollars Invested
Capital Weighting Value
Adj.
Book
Value
of
Assets
(Cost) $5,914,647 0.0% $0
Invested
Capital
(Cost) $22,182,037 0.0% $0
Recent
Securities
Transaction
Backsolve
(Market) $42,932,012 25.0% $10,733,003
Public
Comps
Valuation
(Market) $49,981,604 25.0% $12,495,401
Acquisition
Comps
Valuation
(Market) $55,094,153 25.0% $13,773,538
Discounted
Cash
Flow
Valuation
(Income) $44,606,522 25.0% $11,151,631
Weighted
Market
Value
of
Invested
Capital $48,153,573
Less
Debt ($1,750,000)
Weighted
Equity
Value $46,403,573

23. Step
2:
Alloca,on
• Simply
means
“who
gets
what”
in
the
event
of
an
exit
• Common
shareholders
get
paid
aUer
preferred
Remember
that
the
purpose
of
409A
is
to
value
common
stock
23

24. 24
Option
Value
Analysis Option
1 Option
2 Option
3 Option
4 Option
5 Option
6 Option
7 Option
8 Option
9 Option
10
Definition:
Before
this
breakpoint… Series
C
liquidation
preference
Series
B
&
A
liquidation
preference
Common
participates
Allocated
options
exercise
Series
A
converts
to
common
Common
Warrants
exercise
Unallocated
options
participate
in
value
Series
B
converts
to
common
Series
C
reaches
3.0x
participation
cap
Series
C
converts
into
Common
stock
Break
Points $0 $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 Infinity
Current
Equity
Value
(Price) $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573 $46,403,573
Exercise $0 $20,771,210 $22,182,037 $25,812,886 $27,793,293 $28,582,104 $39,428,548 $56,429,660 $301,546,405 $421,162,792 Infinity
Riskfree
Rate 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31%
Maturity
(in
years) 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Volatility 54% 54% 54% 54% 54% 54% 54% 54% 54% 54% 54%
d1 28.942 1.333 1.264 1.103 1.025 0.995 0.654 0.275 (1.501) (1.855) 0.000
d2 27.998 0.389 0.320 0.159 0.081 0.051 (0.290) (0.669) (2.445) (2.799) 0.000
Call
Option
Value: $46,403,573 $28,763,403 $27,871,048 $25,735,075 $24,660,647 $24,249,313 $19,421,999 $14,152,891 $929,712 $405,738 $0
Incremental
Option
Value $17,640,170 $892,355 $2,135,972 $1,074,429 $411,334 $4,827,313 $5,269,108 $13,223,179 $523,975 $405,738
Option
Value
of
Security Option
1 Option
2 Option
3 Option
4 Option
5 Option
6 Option
7 Option
8 Option
9 Option
10
Series
C $17,640,170 $0 $488,775 $204,543 $67,632 $795,364 $799,205 $1,933,391 $0 $60,031
Series
B $0 $697,195 $0 $0 $0 $0 $0 $414,235 $19,010 $12,542
Series
A $0 $195,160 $0 $0 $40,566 $229,734 $230,844 $566,020 $26,281 $17,340
Common $0 $0 $1,647,197 $689,319 $227,924 $2,680,416 $2,693,361 $6,604,011 $306,632 $202,309
Allocated $0 $0 $0 $180,567 $59,705 $702,136 $705,527 $1,729,925 $80,322 $52,995
A
Warrants $0 $0 $0 $0 $15,507 $87,821 $88,245 $216,372 $10,046 $6,628
Common
Warrants $0 $0 $0 $0 $0 $331,842 $307,524 $754,035 $35,011 $23,099
Unallocated $0 $0 $0 $0 $0 $0 $444,402 $1,005,190 $46,672 $30,793
Total $17,640,170 $892,355 $2,135,972 $1,074,429 $411,334 $4,827,313 $5,269,108 $13,223,179 $523,975 $405,738
Total
Option
Value Option
Value Total
Shares
Share
Value
(Marketable)
Marketability
Discount
Share
Value
(Non-­‐
Marketable)
Series
C $21,989,112 5,934,632 $3.705 0.0% $3.705
Series
B $1,142,982 1,239,906 $0.922 0.0% $0.922
Series
A $1,305,945 1,714,171 $0.762 0.0% $0.762
Common $15,051,167 20,000,000 $0.753 35.7% $0.484
Allocated $3,511,178 5,239,012 $0.670 35.7% $0.431
A
Warrants $424,620 655,276 $0.648 35.7% $0.417
Common
Warrants $1,451,511 2,283,567 $0.636 35.7% $0.409
Unallocated $1,527,057 3,044,179 $0.502 35.7% $0.323
Total $46,403,573 40,110,742

25. Summary
• STEP
1
Enterprise
Value
$48,153,573
Less
Debt
(1,750,000)
Equity
Value
$46,403,573
• STEP
2
Alloca,on
to
common
$15,051,167
Divided
by
#
shares
÷
20,000
Price
per
share
=
$0.753
25

26. Discount
• Discount
for
lack
of
marketability
(DLOM)
ü 25
–
45%
• Discount
for
Venture
Co.
=
35.7%
• Price
per
share
$0.753
less
35.7%
=
$0.484
per
share
26

27. Other
Points
• Value
is
based
on
a
number
of
assump,ons
that
have
a
material
impact
on
the
result
– Projected
cash
flows
– WACC
– DLOM
– Comparable
companies
• Important
to
have
a
“DEFENDABLE
VALUE”
(IRS
and
auditors)
• Important
to
review
report
for
reasonableness
of
assump,ons.
You
know
your
business.
27

28. 28
QUESTIONS
AND
ANSWERS

29. 29
Thank
You!
ScoH
Goodwin,
CPA
sgoodwin@wolfandco.com
(617)
428-­‐5407
Alicia
Amaral
alicia.amaral@scalaranaly,cs.com
(617)
684-­‐5510

30. 30
Resources
To
be
posted
to
TCN
website:
• Detailed
outline
and
PowerPoint
presenta<on
• Scalar
Analy<cs
–
white
paper,
“Sec<on
409A
–
Common
Stock
Valua<on”