Acknowledgments ix Introduction What You Don't Know About Valuation Will Cost You Money 1 Chapter 1 Using Facebook, Twitter, and LinkedIn to Explain VC Valuation Gains and Losses: How VCs, Angels, Founders, and Employees Give Up Investment Cash Flow Every Day 13 Did Valuation Ignorance Cost ConnectU (and the Winklevosses) $50MM? 14 An Expert Doesn't Need a 409A Valuation When He or She Has a Certificate and Basic Math 15 Valuing Facebook's Common Stock Compared to Preferred Stock in Minutes 16 What the Winklevosses Would Have Seen in Any 409A Valuation Report 19 Deriving a Discount for Lack of Marketability for Valuations 27 Facebook at $80 Billion Valuation versus Enron at $80 Billion Valuation 35 Deal Terms, Waterfalls, and the Pre-Money Myth 36 The Pre-Money Myth 44 Summary 56 Chapter 2 Should Venture-Backed Companies Even Consider a DCF Model?: Introducing the Life Science Valuation Case: Zogenix 57 Zogenix: Company Background Summary and Highlights 58 Leaping Forward Just 20 Months, the Company Files for an IPO 64 Order of Valuations Presented in This Case 67 Chapter 3 Valuation Methods versus Allocation Methods Regarding Zogenix 69 Separating Enterprise Value from the Allocation of That Value 69 Valuing Total Equity 72 Using Future Value (FV) and Present Value (PV) to Value Future Cash Flows Today 79 Summary 82 Chapter 4 Applying the Typical DCF Model to a Venture-Backed Company Hardly Ever Works 85 The Gordon Growth Model 85 High Growth Limits the Gordon Growth Model 87 Dividend Irrelevance and Capital Structure Irrelevance 90 Using Comparables (Generally Market Multiples) to Generate a Terminal Value 91 Actual Differences between Angels and VCs versus Perceived Differences 100 Applying Valuation Methods and Allocation Methods at Inception 102 Summary 104 Chapter 5 "Enterprise Value" + "Allocation Methods" = Value Destruction: Undervaluing Companies and Overvaluing Employee Options 107 Most 409A Valuations Undervalue the Company and Simultaneously Overvalue Employee Stock Options 107 Did Auditors Drive Valuators to Overvalue Employee Stock Options? 109 Most 409A Enterprise Value Calculations Ignore the "Takeover" Value of Preferred 113 The Realistic Range of Possibilities Depends on Who the Investors Are 119 Overstating Returns and Understating Returns on the Same Asset (Simultaneously) 125 What Happens to Fund IRRs When You Assume Book Value Equals Market Value? 128 The Real Cost of Fair Value, Fair Market Value, and Enterprise Value 132 Yahoo! Case 137 Chapter 6 Why You Should D.O.W.T. (Doubt) Venture Capital Returns-Option Pool Reserve 159 Unissued Option Pools 159 Value Conclusion Elements Impacted by Option Pool Reserve Assumptions 161 Impact on Parties Relying on Assumptions of VC Investments 176 Chapter 7 If Valuation Can't Make You Money, Do You Really Need It?: Learning Practical Applications from Kayak.com 183 Applying Studies to Real-World Cases 186 Important Questions to Ask 213 Summary 223 Chapter 8 Don't Hate the Appraiser (Blame the Auditor Instead) 225 Interview with Jeff Faust, AVA 226 Summary 236 Chapter 9 Don't Blame the Auditors (Blame the Practice Aid Instead): 409A Valuation Professionals Discussing Topic 820 (FAS 157) with VC CFOs 237 Introduction to the Expert Panelists 238 The Auditor's Valuation "Bible" 239 SAS101 Tests, PWERMS, and OPMs 240 PWERMS and rNPV/eNPV Models 243 Subjectivity and the PWERM (or "Power") Method 243 Finding Inputs for the OPM Model 245 Enterprise Values versus Allocations 246 Next Round Pricing and Topic 820 248 Different Ways of Treating Granted, Unvested, and Reserved Options 250 Valuing Warrants in Venture-Backed Companies 252 Quantifying Qualitative Inputs to Value Conclusions for VC-Funded Companies 253 Discounts for Lack of Marketability (DLOM) and Venture-Fund Portfolios 254 Sharespost, SecondMarket as Market Inputs 258 Summary 262 Chapter 10 Now That You Understand Venture Capital Valuation, Share It 263 About the Author 269 Index 271