VALUATION EXERCISE- BUILDING A CAP TABLE

1

Valuation Basics

The Ambiguity of Valuation

• Valuation is not solely quantitative

• Entrepreneurs must learn valuation methods but be comfortable with ambiguity

• Valuation is “an illusion”, set more by market factors than by formulas

• What’s the price of your company?

• What someone is willing to pay for it?

2

A Willing Buyer and Willing Seller

• Apple Computer and Be, Inc.

• Apple (Amelio) approached Be to acquire it

• Be had revenues of $3 million and 40 employees (financed with $20 million of venture money)

• Apple - $100 MM; Be’s counter - $250 MM.

• Never came to terms; Apple acquire NeXt

• 5 years later, Be acquired for $11 MM

Subjective Factors in Valuation

• Stage of business

• Management team

• Industry (or market)

• Reason for acquisition or sale

• Other factors

• Ultimately, cash flows drive valuation

3

Pre-money and Post-money Values • Pre-money is the value placed on the company

prior to the investment

• Post-money is the value after the investment – Computed as pre-money + amount invested

• Post-money determines how much the investor owns (or the entrepreneur has given up) as a result of the investment

• Post-money is often pre-money of the next round

Why Value Your Company?

• To determine its selling price

• To determine how much to give up for partnering

• To determine how much to give up for an investment

4

How Much Equity Should You Give Up? • Many entrepreneurs ‘unknowingly’ establish their

company’s value – I want to raise $100,000.

– I want to maintain ownership of 90%

– Implied post-money valuation is $1,000,000 • Entrepreneur retains 90%

• A $100,000 investor gets 10%

• $100,000 ÷ $1,000,000 = 10%

• Sophisticated investors may not agree on equity split or valuation

Summary

• Valuations of companies, particularly early stage companies, is highly subjective

• It’s a negotiation process

• Understanding of terms is essential

• Other factors have big impact on ultimate valuation