Valuing Early Stage and Venture Backed Companies

CHAPTER 3

Enterprise Valuation Approaches

In general, the subject of enterprise value approaches has been covered extensively in a number of excellent texts authored by Shannon Pratt, Jay Fishman, Robert Reilly, Jim Hitchner, Gary Trugman, and others, including the original Audit and Accounting Practice Aid Series, published by the American Institute of Certified Public Accountants (AICPA), known as Valuation of Privately-Held-Company Equity Securities Issued as Compensation . Regardless of the purpose of the valuation or the stage of development of the subject company, there are still only three valuation approaches to consider—income, market, and cost. It is not my intent to rehash what has been written elsewhere about these approaches. Enterprise valuation is simply the input (e.g., in the option-pricing model) or the result (e.g., in the probability-weighted expected returns method or advance option-pricing models) of equity allocation methods described in Chapters 4 and 5 of this book. Where the ultimate goal is to estimate the value of a particular class of equity (typically common stock), enterprise valuation methods represent the first step toward that objective.

The characteristics of early stage companies and the valuation approaches that are typically applicable at each of those stages are described farther along in this chapter. In addition, some concepts related to the cost approach that may apply in the valuation of early stage companies are introduced. This chapter ...