BUSINESS VALUATION FOR START-UPS Business Fundamentals Bootcamp March 6, 2015

2 Introductions Scott Goodwin – Wolf & Company, PC –Member of the Firm –Technology Services Team Leader –TCN board of directors and program committee chair Alicia Amaral – Scalar Analytics –Managing Director –Tufts University, Entrepreneurial Finance –CPA and Certified Valuation Analyst, CVA –Past CFO

3 Who is Wolf & Company? Boston based, regionally focused 19 owners and 200 professionals in three offices Niche focused –Technology Services Team Provide our clients with direct access to owner-level expertise Ability to grow with you

Scalar specializes in business valuation for tax, financial reporting, and transaction advisory purposes. 409A Valuation Gift & Estate Valuation Entity Conversion Financial ReportingTax Transaction Advisory Portfolio Valuation (ASC 820) Purchase Price Allocation (ASC 805) Goodwill Impairment (ASC 350) Intangible Asset Impairment (ASC 360) Derivative Valuation (ASC 815) Option Expense Calculation (ASC 718) Fairness Opinion Solvency Opinion Enterprise Valuation Valuation Consulting

5 Agenda Overview of stock compensation plans Overview of IRC Section 409A The who, what, why and how of valuations Q&A

6 Stock Compensation Overview Common forms of stock compensation –Founders shares –Options –Restricted stock Tax treatment Advantages and disadvantages

7 Overview of IRC Section 409A What is it? How does it impact stock compensation? What is the worst that could happen? What do you as an entrepreneur need to know to stay out of trouble? What are best practices at various stages of development?

The Million Dollar Question: What is my company worth?? 8

Standard of Value Investment Value –Value to particular investor –May be strategic buyer –May be synergies Fair Market Value –Assumes hypothetical buyer –This is standard for 409A (per IRS) 409A ≠ VC investment 9

Investment Valuation for Start-Ups Discounted Cash Flow (DCF) Berkus Bill Payne Method Risk Factor Simulation Venture Capital Method 10

David Berkus Method 11 $500k for each Good idea Prototype Quality Team Quality Board Initial Sale (revenue) Value $0 to $2.5 Million

Bill Payne Method Factor Management Size of Opportunity/Market Product/Service Sales Channels Stage of Business Other 12 Weight 30% 25% 10% 15% 100% Rating 100 = Average, 100+ = above average, 100- = below Multiply result by $1.75M

Bill Payne Method Example Factor Management Size of Opportunity Product/Service Sales Channels Stage of Business Other 13 Weight 30% 25% 10% 15% 100% Rating Total Value = $1.75M * = $1,903,125

Risk Factor Simulation Method Risk Factor Management Stage Funding Risk Regulatory Manufacturing Sales & Mktg Competition Technology Litigation Reputational Exit 14 Risk Factor +$500k +$250k -$250k 0 +$250k -$500k +$250k $0 -$250k +$250k $250k Valuation Base$1.75M Risk 250k Value $2.0M

Venture Capital Method Determine the Investor’s required rate of return (ROI), and Terminal Value (TV) Work backwards to get present value (PV) TV can be either exit or next round 15

VC Method Example TV based on estimated revenues and/or Net Income in terminal year* Example: –Estimated revenue in Year 5 is $40M –Average multiplier for industry = 2 –So your estimated value of the company at the end of year 5, or TV = $40M * 2 = $80M *Note: Can also estimate TV based on Net Income and apply average P/E multiples 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/PV = ROI To solve for PV: PV = TV/ROI 17

VC Method Example Say in our example that investor requires a 20X ROI PV = TV/ROI PV = $80M / 20 PV = $4,000,000 18

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Three Valuation Methods Valuation Methods 409A 1.Asset/Cost Approach 2.Market Approach 3.Income Approach 20

2. Market Approach a)Recent securities transactions method b)Comparable (guideline) public company method c)Comparable transaction method d)Industry-specific multiples 21

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. 22

Steps in the Valuation 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 23

Valuation 7 Step 1 – Determine enterprise value using weighted average of applicable methods (Asset, Market and Income)

Step 2: Allocation Simply means “who gets what” in the event of an exit Common shareholders get paid LAST (after debt and preferred) Remember that the purpose of 409A is to value common stock 25

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

Fair Market Value 28

Discount Discount for lack of marketability (DLOM) 25 – 45% Discount for Venture Co. = 35.7% Price per share $0.753 less 35.7% = $0.484 per share 29

QUESTIONS AND ANSWERS Scott Goodwin, CPA (617) Alicia Amaral (617) Remember to Complete the Speaker Survey: cic15.bfbootcamp.net / ‘click’ on speakers / select your speaker