Who else can make valuing early stage companies look cool and cutting edge? At last month’s ASA Fair Value Summit in San Francisco, Neil Beaton presented the topic in a mock turtleneck and a portable microphone, looking like “Steve Jobs at an Apple shareholders’ meeting,” according to ace reporter Josh Cashman (Arcstone Partners), who attended the event. Beaton was not just making an effort to elevate the hipness of the BV profession. “He’s establishing clear work-product standards,” Cashman says, in particular by publishing BVR’s Guide to Valuations for IRC 409A Compliance, available for pre-order now.
The new Guide specifically addresses the three traditional valuation methods (an income approach should evaluate the path to profitability; the market approach must incorporate a “back-solve;” and the cost approach is generally not relevant). It also discusses when to use an OPM or PWERM (or an overlay of both), and how to handle and/or capture:
- The effect of the economy and its influence on early stage companies and option grants;
- A slow IPO market;
- Increased venture funding in a depressed economy;
- Advanced and outstanding options;
- Companies that have yet to produce any products;
- Management incentives, such as executive shares;
- Down rounds and mandatory subsequent rounds of financing, originally contemplated as part of a venture capital investment plan; and
- Subsequent rounds of “arm’s length” financing if all of the same investors participate.
Ultimately, the Guide underscores the fact-intensive inquiry of early-stage valuations and helps the analyst apply good judgment and analysis. “Everything is driven by the circumstances, particularly in such complex matters,” Beaton told ASA attendees. “So much depends on factors such as the strength of the company, the strength of investors, the nature of the industry, and the cycle in the economy.”
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