WhatsApp with tricky startup valuations?

BVWireIssue #139-2
April 9, 2014

The WhatsApp deal is an extreme example of valuing an early-stage entity that has lots of potential and value but doesn’t have the stability in revenues or cash flows required to use the traditional valuation methods. Valuation analysts are facing an area of growing challenge when confronted with engagements involving entities with high growth and complex capital structures with potential for dilution as venture capital and angel investors become involved.

This becomes more challenging if the startup company is entangled in a divorce proceeding, and it is the topic of a session at the upcoming AICPA/AAML Conference on Divorce (April 24-25, Las Vegas). The session, “Challenges to Valuing, Protecting and Treating an Owner’s (Dilutable) Interest in a Startup Business,” will be conducted by David W. Griffin, Esq. (Rutkin, Oldham & Griffin LLC) and Ronald L. Seigneur (Seigneur Gustafson).

Different animal: This kind of assignment is fundamentally different from valuing an established company, Griffin and Seigneur point out. There may be no comparables, and there may not be an ability to utilize traditional methodologies such as determining a discount rate and applying it to free cash flows. Revenue forecasts are more hope than reality, and, in some instances, startups will not forecast revenue, due to the fear of dampening valuation expectations from potential angel investors.

In a divorce context when a startup company is involved, the valuation expert needs to review all underlying documents, account for the treatment of startup costs and related financing, understand voting rights and restrictions on stock including conversion rights and the potential for dilution. At times, debt is convertible to stock on a certain date or upon the occurrence of a future event, either of which can dilute the ownership interest, which is the subject of valuation (and equitable distribution). Owners or high-ranking employees may be paid in some combination of stock and cash and with no consistency. What is the stock component worth? Can it be sold for the purposes of supporting the family? Should the nonowner spouse negotiate for lump-sum alimony rather than wait and see?

During their presentation, Griffith and Seigneur will address these and other questions and give real-life examples of how these issues were addressed. For information on the conference, click here.

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