Shiva Badruswamy's Idea Game

Is Enterprise Value per employee a good yardstick for valuation?

2010-11-22T16:53:00.000-05:00

I wanted to fit a distribution to the EV per employee metric I took from tens of 409A valuation data points. I constructed an excel chart using the "frequency" function to count the EV per employee metric as a histogram and then observed the shape and size of the histogram. While there is some right handed tail because of skewed distributions due to biotechnology companies and some

An analysis of 409A valuation data points

2010-10-01T18:37:00.001-04:00

I took a sample of various valuation data points I obtained during the 409A valuation and charted it out. I believe the chart gives us some interesting conclusions. The X-Axis in this picture is the AICPA Operational Development Level (the greater the operation level, the more mature the company is) and the Y-Axis is the Post-Money Valuation (PMV) Per Employee that a company got during its

Ok, we have the search engine and the iPAD. Now what?

2010-09-25T17:31:00.002-04:00

After looking at the issues facing our country in the last 2 years, one thing has become clear to me: technology has not been able to solve things that matter the most. The two things Americans spend most of their money are housing costs and healthcare. And the two areas that technology has been least helpful are in these areas. Technology has not helped bring about a rational housing market,

Why Intellectual Property needs to be periodically valued?

2010-09-07T12:08:00.000-04:00

There has a been a research study which says that S&P 500 derives 67% of its value from Intellectual Property (IP) or Intangible assets. Think about it for a minute. The largest export from America today is IP. In a deteriorating business climate, what sets you apart from others are sustainable competitive advantages such as your workforce, patents, trade marks, copyrights, goodwill, client lists

Why participating preferences maybe absurd and how 409A valuations can consider this absurdity?

2010-07-26T17:39:00.002-04:00

Imagine a term sheet where your pre-money valuation is $25million and you raised $5 million. The post money valuation therefore is $30 million and the VCs share of the company is 5/30 or 16.7%. Now, the liquidation preference (typically at 1X the investment dollars or issue price) would be $5 million and let us say the VC wants another 1X in participating preference. One of the interesting things

409A valuation and mark-to-market reconciliation

2010-07-16T13:57:00.001-04:00

409A valuation, as we know by now, is supposed to be a legally sound valuation, though some offshore companies would never get this concept due to the poor legal environments in their own countries. But what about the FAS 156/157 US GAAP mark-to-market accounting that venture capitalists and other institutional investors are supposed to maintain? Currently, the 409A valuation study and US GAAP

Valuation trends and Royalty Rates in Biotechnology and Pharmaceutical deals

2010-07-01T12:39:00.001-04:00

The Licensing Executive Society of USA and Canada (http://www.lesusacanada.org/MainNav/Resources/biopharmrates.aspx), reports in their 2008 Royalty rate survey (a total of 230 deal responses were submitted, out of which 155 completed deals were analyzed) that: Small Molecule compounds were included in close to 50% of deals Anti-cancer compounds/drugs comprised almost 33% of all deals reported

Valuation methods and public markets debacle: Are there lessons for private company valuations?

2010-06-24T14:08:00.000-04:00

While examining a number of valuation models and arguments by audit personnel, we found that many were overly focused on the use of sophisticated valuation tools rather than on the validity of the underlying data. The idiom "Garbage In, Garbage Out" holds true here. Like we witnessed in the Collateralized Debt Obligations (CDO) debacle on Wall Street, sophisticated valuation models with the wrong

Evidentiary requirement and 409A valuation

2010-06-15T20:23:00.000-04:00

Several clients ask us questions about what types of information is collected and why. You see, 409A valuations have got more to do with substantiation and evidence and less to do with valuation techniques and number crunching. One of the things we have noticed, especially, in valuation work from overseas is use of data sources, enumeration and explanation of data, and calculation methods that

Website value calculators are not appropriate for all website valuations!

2010-05-29T21:21:00.001-04:00

There has been a mushrooming of website valuation calculators that purportedly calculate the value of websites. Most algorithms claim that they use a host of freely available information over the web such as back links, page views, rankings and other similar information to calculate the value of your website. Then they also also claim that they "estimate" how much advertising dollars the website

Too small to cope with 409A regulations? Try Restricted Stock!

2010-05-19T13:04:00.001-04:00

One of the things about 409A regulations is that it imposes a valuation requirement on you, which could be expensive depending on the service provider. Not every service provider operates efficiently and only a few like us are able to provide the highest quality at affordable rates. It took a lot of trial and error work, technology utilization and template work to get to this business proposition

Are some service providers violating the Independent Appraisal Presumption that is a MUST for a 409A valuation?

2010-05-19T02:05:00.000-04:00

When we analyzed some of the service providers out there for 409A valuation services, we have come across some companies that provide 409A valuation services possibly in violation of the independent appraisal presumption. These companies provide other services such as banking, receivables collection, IPO advisory, CFO rental services and similar such services for a fee to privately held companies

Does Google click for you? Are there link frauds, bid frauds and click frauds?

2010-05-18T19:07:00.000-04:00

I have learnt quite a bit from using Google Adwords for my advertising campaign. I have been able to tweak key words and write blogs that have pushed Accuserve to the #1 result when the keywords "409A valuation", the most relevant keywords for our business, are used in the search engines. My blog results also show up as #1 for that keyword. But here's the problem: Google seems to want me to

The "Take Notice" effect on revenue modeling for start-ups

2010-05-04T12:54:00.002-04:00

After completing more than 400 valuation reports including 409A valuations, we have obtained certain heuristic knowledge that we can share for the benefit of the start-up community. In this blog, I want to analyze something called the "Take Notice" effect. We have reviewed business models of so many companies that have almost similar hockey stick type projection of revenues. When we review these

Do start-ups have to project a growth of 150%+ to get a good valuation?

2010-05-04T12:38:00.001-04:00

During one of our 409A valuation analysis and the subsequent sale of the company to a public company (known for bargaining fair valuation multiples), we discovered that the company had been strategically sold for a valuation multiple much higher than the MVIC to Sales or Price to Sales multiples available out there for comparable companies, even industry leaders. This high valuation multiple

What methods are being used for biotechnology valuations?

2010-05-03T23:38:00.002-04:00

In March 2009, Sangeeta Puran, Senior Associate, of Mayer Brown International, London, UK completed a study examining the methods used to value drug development programs. The study was conducted by interviewing individuals in the UK for a period of four months from a representative sample of twelve leading industry participants, including small biotech business development, large pharma and large

Post the dot com bubble: Silicon Valley job and innovation report

2010-05-01T18:03:00.001-04:00

The Bureau of Labor Statistics in its Regional Report dated August 2009 says "Of the 11 industries analyzed in this report, 8 experienced employment declines and 3 industries—pharmaceuticals, aerospace, and scientific research—exhibited employment growth during the 2001 to 2008 period. " The BLS report states that employment in silicon valley declined by 17% in the 2001-2008 period, while the

IRS begins Section 409A audits?

2010-04-29T13:55:00.001-04:00

According to a release by Jones Day (http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6738), the IRS has sent Information Document Requests (IDRs) to companies that fall under Section 409A. The 409A section, as we all know, was enacted in 2004 (signed into law as part of the American Jobs Creation Act of 2004 and became effective Jan. 1, 2005) but took effect for most

Due diligence in 409A valuation reports

2010-04-29T02:54:00.001-04:00

I wanted to write this note because we are receiving projects/reports where lack of communications between appraisers and companies is leading to erroneous reports. In a 409A valuation report, the emphasis is always on due diligence and supportable data/conclusions and less on the tools to arrive at the final discounted value. It takes industry experience and an understanding of the risk factors

IRC 409A tax court cases

2010-04-28T14:07:00.002-04:00

With some of the first court cases appearing in the 409A area (See Slater vs Commissioner of Internal Revenue at http://www.leagle.com/unsecure/page.htm?shortname=in20100111d35), it is time to assume that the IRS is auditing 409A provisions and associated valuations. It is in this background we have to note the mushrooming of firms in this area. It has come to our notice that several firms are

Lets play the ratings game!

2010-04-27T00:42:00.000-04:00

Now that the Goldman imbroglio threatens the forward economic movement again, it is important that we ask plenty of questions. While Goldman is being sued for acts of negligence, why arent the rating agencies being sued? 93% of sub-prime mortgage was downgraded from AAA to junk status at the beginning of the crisis, yet the agencies get to have immunity. If the rating agencies cannot be sued, why

When negotiating term sheets, should a founder just focus on anti-dilution clauses?

2010-04-16T21:18:00.002-04:00

Many founders are focused on whether or not to include anti-dilution clauses. What they fail to realize is that the funding structure is more complex than just dilution. A VC can invest in a way that it may look like you are holding 50% of the company's common stock, but you may get allocated a much lesser value. For instance, if the VC negotiates a 2X liquidation preference with a full

A good year for Biotechnology ETFs

2010-02-23T18:02:00.003-05:00

AccuServe uses domestic, specialty ETFs focused on health care/biotechnology to assess how these funds performed and arrive at an overarching trend year-over-year for valuations. 1-year returns of such funds have ranged between 11.6% and 57.4% with a trading volume-weighted average of 25.8% return. Clearly, the valuations have improved significantly. The relatively highly traded (70.7% of trading

Private equity/VC valuation and 409A

2010-02-22T12:18:00.003-05:00

At Accuserve, we serve both the venture capital/private equity companies (when we mark to market their portfolios) as well as portfolio companies when they issue stock options, acquire intangible assets and so on. One of the recent observations has been as to whether only one set of valuation is required for both mark-to-market purposes for the VC/PE firms as well as the underlying common stock

Founder Stock Sale and 409A valuation

2010-01-28T17:48:00.004-05:00

In today's tough economy, founders of small companies are figuring out a way to get more liquidity for their stocks by partially liquidating their holdings with existing investors. This could mean that founder's common stocks are being bought at the latest preferred stock prices, thereby creating implied valuations that may make the minority common stock price jump by a degree of magnitude.