Table of Contents
Preface ix
Acknowledgments xi
About the Author xiii
Chapter 1 Laying the Foundation 1
A Unique Landscape 1
An Overview of the Venture Capital Industry 8
Conclusion 14
Chapter 2 Understanding Early Stage Preferred Stock Rights 17
Stock Rights 19
Contractual Rights 28
Conclusion 32
Chapter 3 Enterprise Valuation Approaches 35
Relevancy of Traditional Valuation Approaches 35
Cost Approach 40
Market Approach 43
Income Approach 45
"Vectoring" Valuation Approach 46
The Income Approach as an Oxymoron 53
Conclusion 58
Chapter 4 Application of the Option-Pricing Method in Allocating Enterprise Value 59
Important Assumptions Underlying the Option-Pricing Model 61
Option-Pricing Method Steps in Application 66
Other Considerations in the Option-Pricing Method 86
Pros and Cons of the Option-Pricing Model 87
Conclusion 88
Chapter 5 Application of the Probability-Weighted Expected Returns Method in Allocating Enterprise Value 89
Illustration of the PWERM 90
PWERM Critical Assumptions 94
Overview of Stock Rights 96
Identification of Outcomes 98
Updating PWERM Analyses 104
Conclusion 105
Chapter 6 Applicable Discounts for Early Stage Companies 107
Basis of Discounts 108
Suggested "Corrections" to the Current Use of Put Models for Quantifying DLOMs 114
Dilution Discount 119
The Likelihood of Liquidity 120
Conclusion 123
Chapter 7 Advanced Valuation Topics for Early Stage Companies 125
Utilizing the OPM as a "Valuation" Methodology 127
Sequential and Compound Options 127
Allocating the Residual Value 131
Further Extensions for Compound Options 137
Venture Capital Rates of Return 139
Executive Stock Compensation 143
Conclusion 143
Appendix A Allocation of Enterprise Value Using the Option-Pricing Method: Treatment of Derivatives on Common Stock 145
Appendix B Volatility in the Option-Pricing Model 155
Notes 175
Index 179
