WELCOME TO OUR WEBINAR ISSUING EQUITY AS COMPENSATION

Transcription

1 WELCOME TO OUR WEBINAR ISSUING EQUITY AS COMPENSATION Monday, November 4, :00 p.m. EST Presented by: *This webinar is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

2 Agenda I. Introduction II. Overview III. 409A IV. Need for a Valuation V. Valuation Approaches and Methodologies VI. Use of Outside Valuation Providers VII. De-Bunking the Myths VIII. Example IX. Q&A Appendix: Speaker Biographies 2

3 INTRODUCTION

4 Introduction CURRENTLY SPEAKING Speakers Sidney Burke Partner DLA Piper Rita Patel Partner DLA Piper Lynn Sommer Senior Director Alvarez & Marsal Valuation Services Jason Andrews Manager Alvarez & Marsal Valuation Services Mark McMahon Managing Director Alvarez & Marsal Valuation Services 4

5 Introduction What this webinar will address: Why grant equity compensation in the private equity context? Why should you still be considering Section 409A? What financial reporting requirements should you consider? Why is it important to get a valuation? When is the right time to get a valuation and what is it used for? What are common valuation methodologies utilized in valuing complex capital structures? Common problems and pitfalls you will want to avoid. Guidance for working with an external valuation provider pricing, best practices, what to expect, what to do if you are not satisfied with the valuation. 5

6 OVERVIEW

7 Overview Why grant equity? Provides an incentive for employees to perform in the best interest of the company Preserves capital by paying lower cash compensation (and thus tax/accounting benefits) Allows a private company to compete for talent by holding out the prospect of significant appreciation in the value of the equity 7

8 Overview General Tax Concepts Tax treatment depends on type of equity that is granted, holding periods, and other regulatory requirements. Ordinary Income versus Capital Gains Restricted Stock taxation on vesting; taxation on sale of underlying stock Options taxation on exercise (ISOs versus NQSOs); taxation on sale of underlying stock RSUs taxation on settlement date; taxation on sale of underlying stock SARs - taxation on exercise; taxation on sale of underlying stock Profits Interest Section 83(b) Elections 8

9 409A

10 409A What is Section 409A? Tax Code section intended to clamp down on service providers choosing when they ll have taxable income (whenever they want). 10

11 409A What is Section 409A? Applies to any employee, director, independent contractor not just executives of both private and public companies. 11

12 409A and why do we care? Violation results in a severe tax penalty to the individual and reporting and withholding obligations for the employer. Penalty is immediate income inclusion AND additional 20% income tax at time right vests. 12

13 409A What does Section 409A govern? 13

14 409A Deferred Compensation is a binding promise today to pay compensation in a future tax year. 14

15 409A Almost any compensation arrangement can be deferred compensation subject to Section 409A. 15

16 409A Main focus of Section 409A: timing of payments Permissible payment dates: fixed date or schedule separation from service change in control event death These are specifically defined in regulations.* *other than death (so far) disability Arrangements must be in writing and reflect Section 409A compliant payment timing provisions 16

17 409A Exceptions to 409A Short-term Deferral Exemption of payments made no later than 2 ½ months after the later of (a) employee s or (b) employer s taxable year in which the right to deferred compensation vests Need to consider vesting which can be complicated dependent on when there is no longer a substantial risk of forfeiture 2 Times/2 Year Rule Applies to involuntary terminations ONLY Payment must be less than the lesser of (a) 2 times annual compensation or (b) 2 times the IRS limit for tax qualified plans Must be paid by end of second year following termination Arrangements must be in writing and reflect Section 409A compliant payment timing provisions 17

18 409A 409A Equity Compensation Partnership Interests Not subject to Section 409A Including profits interests *** expect future guidance re Section 409A Restricted Stock Not subject to Section 409A, whether or not Section 83(b) election is made Restricted Stock Units Not subject to Section 409A if shares are issued at time of vesting or by March 15th of the year following the vesting event o Retirement vesting? If subject to Section 409A, must provide for issuance of underlying shares upon permissible 409A event separation, change of control (as defined under 409A), or specified date 18

19 409A Types of Equity Compensation Impacted OPTIONS ISOs are exempt Section 423 purchase rights are exempt Nonqualified stock options and SARs are exempt ONLY IF o o o o o o The exercise (or base) PRICE of the option (or SAR) is not LESS THAN the FMV of the underlying stock on the GRANT DATE There are no deferral features that would delay the recognition of income beyond the exercise date Issued for service recipient stock Grant must state fixed number of shares to be issued Nonqualified option exercisable for preferred stock is subject to Section 409A and needs to comply; service recipient stock is common stock of employer or entity up the chain KEY TERMS PRICING at FAIR MARKET VALUE & GRANT DATE 19

20 409A FMV Considerations What is FMV? Board s determination of FMV based on a reasonable application of a reasonable valuation method Need to document FMV in granting resolutions Non-SAFE HARBOR Estimate (what if you are wrong?) SAFE HARBORS Internal Evaluation by a Sophisticated BOD member -- Start-up Exception Formula Pay outside firm to do valuation 20

21 409A Valuation Methodologies Non-SAFE HARBOR Must be determined by the reasonable application of a reasonable valuation method: reasonableness is a facts and circumstances inquiry, based on the following six factors: Asset value (tangible and intangible) Present value of future cash flows Market value of equity in comparable publicly traded businesses Consistency of use of valuation method for all equity Use of method for other purposes that have a material economic effect on company (e.g., for investors or creditors) Other relevant factors (control premiums, illiquidity discounts etc) 21

22 409A Valuation Methodologies SAFE HARBOR Start-Up Exception Reasonable, good faith valuation of "illiquid stock of a start-up company," supported by a written report that takes into account the six factors above, AND Company in business less than 10 years No class of publicly traded stock Stock not subject to put or call Company may not reasonably anticipate change in control or IPO Formula Approach Use of formula that, if used as part of a Section 83 "nonlapse restriction," would be considered to be FMV for purposes of Treas. Reg , provided that: Stock is valued in the same manner for purposes of any nonlapse restriction applicable to the transfer of any shares of such class of stock (or substantially similar class of stock); Stock is valued in the same manner for all noncompensatory purposes including regulatory filings, loan covenants, issuances to/ repurchases of stock from non-service providers and other third party arrangements; and Formula method is used consistently for all such purposes 22

23 409A Valuation Methodologies SAFE HARBOR Third Party Appraisal Independent appraisal as of a date no more than 12 months before award (or other valuation) date: meet same requirements as for ESOP valuations under Section 401(a)(28)(C) 23

24 NEED FOR A VALUATION

25 Need For A Valuation When should you perform a valuation? 409A / Safe Harbor Financial Reporting Requirements - ASC 718 How often do you need a valuation? What is the valuation used for? 25

26 Need For A Valuation FASB Accounting Standards Codification 718 Stock Compensation - Applies to all stock-based compensation in exchange for employee s services - Stock Options - Restricted Stock & Restricted Stock Units (RSUs) - Stock-Appreciation Rights (SARs) - Applies to public and non-public companies - Vesting Conditions: - Market Condition Based on performance of company s stock price - Performance Condition Based on employee rendering service for a specified period and achieving a specific performance target of the company s operations - Service Condition Based solely on employee rendering service for the requisite service period 26

27 VALUATION APPROACHES AND METHODOLOGIES

28 Valuation Approaches and Methodologies Valuation of common stock, preferred stock, warrants, and convertible securities for a company with a complex capital structure (more than one class of equity) requires a two step process: 1. Estimate the Equity (or Enterprise) Value 2. Allocate Equity (Enterprise) Value among the various securities Equity (Enterprise) Value (Term or Convertible Debt) Preferred Stock Common Stock Warrants Options 28

29 Step One: Estimate the Equity (Enterprise) Value Utilize valuation methodologies as appropriate to estimate the Equity (Enterprise) Value Market Approach: Guideline Transaction Method Market Approach: Guideline Public Company Method Income Approach: Discounted Cash Flow Method Enterprise Value Debt Asset/Cost Approach Cash Market Approach: Subject Company Transaction Method* Equity Value Marketable, Control Basis * May have some instances where derived value includes debt 29

30 Step One: Estimate the Equity (Enterprise) Value Asset/Cost Approach Market Approach: Guideline Transaction Method Market Approach: Guideline Public Company Method Market Approach: Subject Company Transaction Method Income Approach: Discounted Cash Flow Method Stage of Development Early or Distressed Middle to Late (requires relevant financial statistics) Middle to Late (requires relevant financial statistics) Any Any Key Concept Minimal financial history and lack of comparable market information Normalized cash flow and selected transaction target companies are comparable Normalized cash flow and selected publicly traded companies are comparable Recent round of financing and/or secondary market transactions Management can reasonably project future cash flow Methodology Adjusts subject company s assets and liabilities to Fair Value Applies observed transaction multiples to the subject company financial statistics Applies observed valuation multiples to the subject company financial statistics Utilizes transaction of subject company s security to calculate implied equity or enterprise value using selected allocation methodology (also referred to as a back-solve) Discounts the economic benefit stream to present value using the appropriate riskadjusted discount rate 30

31 Step One: Estimate the Equity (Enterprise) Value Subject Company Transaction (Back-Solve) Method Solving for the equity (enterprise) value that is consistent with a recent transaction in a subject company s security, considering the rights and preferences of the security Key Considerations: Consider differences in rights and preferences between the recently transacted security and previously issued securities For impending financing, evaluate risk associated with executing transaction Typically allocation utilizes Option Pricing Method, may consider Probability Weighted Expected Return Method Subject Company Transaction Method becomes more reliable for later stage financings with VC investors compared to early stage financings with angel investors The occurrence of significant events or key milestones between financing and valuation date Key milestones may indicate an updated valuation is necessary - consider any event that affect margins, growth, or risk profile of the subject company Examples of Key Milestones An Internet content provider successfully implements a plan to monetize its mobile product with an existing user base Executing a key partnership with a major customer to promote the firm s product as it s preferred brand A service business identifies new areas of customer interest and updates its service offerings A manufacturing company invests in technology that allows them to have lower personnel costs and to use less material A pharmaceutical company obtains U.S. FDA approval for a drug candidate A company completes a beta test of a lead product or service and begins generating revenue 31

32 Step Two: Allocate Equity (Enterprise) Value Commonly used Allocation Methodologies: Current Value Method (CVM) BSM Option Pricing Method (OPM) Binomial Option Pricing Method (OPM) Probability Weighted Expected Return Method (PWERM) Hybrid Method Stage of Development Early or Imminent Liquidity Event Any Any Middle to Late Any Methodology Allocates equity (enterprise) value to the various securities based on respective rights and preferences, assuming immediate liquidation Allocates the equity (enterprise) value to the various securities based on a concept that each security has a claim on the future equity (enterprise) value, modeled as a call option Binomial OPM appropriate when securities have non-linear or bimodal payoffs based on future equity (enterprise) values or rights and preferences that may be triggered prior to the liquidity event (e.g. redemption features) Allocates future equity (enterprise) value to the various securities under various future liquidity event scenarios then the allocated amounts are discounted to the present at a riskadjusted discount rate and probability weighted Hybrid between PWERM and OPM, estimating the probability weighted value across various scenarios, but using OPM to estimate the allocation of value for one or more scenarios 32

33 Step Two: Allocate Equity (Enterprise) Value CVM BSM or Binomial OPM PWERM Hybrid Method Pros Easy to understand Easy to implement Easy to implement and audit Assigns probability objectively, based on risk neutral framework Considers various terms of shareholder agreements Recognizes optionality of security Useful for companies with high degree of uncertainty of potential future equity (enterprise) values Considers multiple discrete liquidity events and future values Considers various terms of shareholder agreements under each exit scenario Forward looking Ratios of preferred to common isn t overly sensitive to assumptions Useful alternative to modeling all PWERM scenarios Captures optionlike payoffs of various share classes and also considers future scenarios Cons Not forward looking Fails to consider optionality of security Difficult to explain and understand Sensitive to assumptions Assumes single estimate of liquidity event timing Unable to capture certain dilutive impacts Complex to implement Requires detailed assumptions about future outcomes Considers only specific set of discrete outcomes Subject to significant judgment Similar to OPM and PWERM Assumes equity value follows log-normal distribution Doesn t capture milestone value changes 33

34 Step Two: Allocate Equity (Enterprise) Value Key Inputs Used in Allocation Methodologies: Inputs CVM BSM or Binomial OPM PWERM Hybrid Method Total Current Equity Value Rights & Liquidity Preferences Liquidity Event Timing Volatility Exercise Price Risk Free Rate Annual Dividend Common Stock 34

35 Valuation Approaches and Methodologies Discount for Lack of Marketability (DLOM) Value allocated to common stock does not represent the Fair Value; DLOM is typically appropriate to account for the illiquidity, future dilution (future financing rounds), and other factors related to the common stockholders inability to readily sell their shares Discount is applied after the allocation of the equity (enterprise) value Estimated based on both qualitative and quantitative analyses o o Qualitative analysis based on observations from many restricted stock and pre- IPO studies Quantitative analysis based on several protective put option analyses Discount for Lack of Control (DLOC) Value allocated to common stock may not represent a minority interest and a DLOC may be appropriate to account for the control differences between common stockholders and preferred stockholders Proceed with caution generally no or relatively small discounts are appropriate 35

36 USING AN EXTERNAL VALUATION PROVIDER

37 Using an External Valuation Provider Considerations: Auditor comfort Expertise Process: Typical Data Needs Timing Iterative process If you re not satisfied: Ask questions regarding key assumptions Analyze factors that were considered Pricing 37

38 DE-BUNKING THE MYTHS

39 De-Bunking the Myths A valuation will affect the sale price of my business A valuation is a black box process with no input from management and with an answer An external valuation is cost-prohibitive Valuations are good for 12 months 39

40 EXAMPLE

41 Assumptions 41

42 Example I: Capitalization Summary Capitalization Equity Class Outstanding Fully Diluted Series B Preferred Stock 750, % 750, % Series A Preferred Stock 1,000, % 1,000, % Common Stock 1,000, % 1,000, % Common Stock Options 250, % 250, % 3,000, % 3,000, % Equity Class Original Issue Price Liquidation Ratio Liquidation Preference Liquidation and Participation Rights Participation Participation Cap Conversion Price Conversion Ratio Liquidation Preference Series B Preferred Stock $ x $ Non-Participating NA $ x $ 5,000,000 Series A Preferred Stock $ x $ Non-Participating NA $ x $ 1,000,000 Common Stock $ - $ - Common Stock Options $ - $ - $ 6,000,000 42

43 Example I: Breakpoint Analysis Incremental Value per Breakpoint Equity Class No. 1 No. 2 No. 3 No. 4 Series B Preferred Stock $ 5,000,000 $ - $ - $ - Series A Preferred Stock $ 1,000,000 $ - $ - $ 5,666,667 Common Stock $ - $ 500,000 $ 500,000 $ 5,666,667 Common Stock Options $ - $ - $ 125,000 $ 1,416,667 Total Incremental Value $ 6,000,000 $ 500,000 $ 625,000 $ 12,750,000 Cumulative Value per Breakpoint Equity Class No. 1 No. 2 No. 3 No. 4 Series B Preferred Stock $ 5,000,000 $ 5,000,000 $ 5,000,000 $ 5,000,000 Series A Preferred Stock $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 6,666,667 Common Stock $ - $ 500,000 $ 1,000,000 $ 6,666,667 Common Stock Options $ - $ - $ 125,000 $ 1,541,667 Total Value $ 6,000,000 $ 6,500,000 $ 7,125,000 $ 19,875,000 Exercise Proceeds $ - $ 125,000 $ 125,000 $ 125,000 Total After Exercise Proceeds $ 6,000,000 $ 6,625,000 $ 7,250,000 $ 20,000,000 Cumulative Value per Outstanding Shares Equity Class No. 1 No. 2 No. 3 No. 4 Series B Preferred Stock $ $ $ $ Series A Preferred Stock $ $ $ $ Common Stock $ - $ $ $ Common Stock Options $ - $ - $ $ Breakpoint No. 1: Preferred stock liquidation preference Breakpoint No. 2: Common stock options exercise Breakpoint No. 3: Series A preferred stock converts to common stock Breakpoint No. 4: Series B preferred stock converts to common stock 43

44 Example I: Option Pricing Method Black-Scholes-Merton Option Pricing Model Assumptions Total No. 1 No. 2 No. 3 No. 4 End Underlying Asset Value (1) $ 15,470,035 $ 15,470,035 $ 15,470,035 $ 15,470,035 $ 15,470,035 Exercise Price (2) $ 6,000,000 $ 6,500,000 $ 7,125,000 $ 19,875,000 Term (3) Expected Volatility (4) 75.0% 75.0% 75.0% 75.0% Dividend Yield 0.0% 0.0% 0.0% 0.0% Risk-free Rate (5) 2.0% 2.0% 2.0% 2.0% N(d1) N(d2) Value of Call Option $ 15,470,035 $ 12,103,665 $ 11,919,982 $ 11,701,570 $ 8,778,767 Incremental Option Value $ 3,366,370 $ 183,682 $ 218,412 $ 2,922,803 $ 8,778,767 Breakpoint Participation Percentages Equity Class No. 1 No. 2 No. 3 No. 4 End Series B Preferred Stock 83.3% 0.0% 0.0% 0.0% 25.0% Series A Preferred Stock 16.7% 0.0% 0.0% 44.4% 33.3% Common Stock 0.0% 100.0% 80.0% 44.4% 33.3% Common Stock Options 0.0% 0.0% 20.0% 11.1% 8.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% Allocation of Incremental Option Value Equity Class Total No. 1 No. 2 No. 3 No. 4 End Series B Preferred Stock $ 5,000,000 $ 2,805,308 $ - $ - $ - $ 2,194,692 Series A Preferred Stock $ 4,786,341 $ 561,062 $ - $ - $ 1,299,024 $ 2,926,256 Common Stock $ 4,583,692 $ - $ 183,682 $ 174,730 $ 1,299,024 $ 2,926,256 Common Stock Options $ 1,100,002 $ - $ - $ 43,682 $ 324,756 $ 731,564 Total $ 15,470,035 $ 3,366,370 $ 183,682 $ 218,412 $ 2,922,803 $ 8,778,767 44

45 Example I: Allocation Summary Allocation Summary Equity Class Shares Aggregate Value Value Per Share Discount for Lack of Control Minority, Marketable Value Discount for Lack of Marketability Fair Value Series B Preferred Stock 750,000 $ 5,000,000 $ 6.67 $ 6.67 $ 6.67 Series A Preferred Stock 1,000,000 $ 4,786,341 $ 4.79 $ 4.79 $ 4.79 Common Stock 1,000,000 $ 4,583,692 $ % $ % $ 3.21 Common Stock Options 250,000 $ 1,100,002 $ 4.40 $ 4.40 $ 4.40 Total 3,000,000 $ 15,470,035 45

46 Example II: Capitalization Summary Capitalization Equity Class Outstanding Fully Diluted Series B Preferred Stock 750, % 750, % Series A Preferred Stock 1,000, % 1,000, % Common Stock 1,000, % 1,000, % Common Stock Options 250, % 250, % 3,000, % 3,000, % Equity Class Original Issue Price Liquidation Ratio Liquidation Preference Liquidation and Participation Rights Participation Participation Cap Conversion Price Conversion Ratio Liquidation Preference Series B Preferred Stock $ x $ Participating 2.50 x $ x $ 5,000,000 Series A Preferred Stock $ x $ Participating 2.50 x $ x $ 1,000,000 Common Stock $ - $ - Common Stock Options $ - $ - $ 6,000,000 46

47 Example II: Breakpoint Analysis Incremental Value per Breakpoint Equity Class No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 Series B Preferred Stock $ 5,000,000 $ 375,000 $ 750,000 $ 750,000 $ 5,625,000 $ - Series A Preferred Stock $ 1,000,000 $ 500,000 $ 1,000,000 $ - $ 7,500,000 $ 6,666,667 Common Stock $ - $ 500,000 $ 1,000,000 $ 1,000,000 $ 7,500,000 $ 6,666,667 Common Stock Options $ - $ - $ 250,000 $ 250,000 $ 1,875,000 $ 1,666,667 Total Incremental Value $ 6,000,000 $ 1,375,000 $ 3,000,000 $ 2,000,000 $ 22,500,000 $ 15,000,000 Cumulative Value per Breakpoint Equity Class No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 Series B Preferred Stock $ 5,000,000 $ 5,375,000 $ 6,125,000 $ 6,875,000 $ 12,500,000 $ 12,500,000 Series A Preferred Stock $ 1,000,000 $ 1,500,000 $ 2,500,000 $ 2,500,000 $ 10,000,000 $ 16,666,667 Common Stock $ - $ 500,000 $ 1,500,000 $ 2,500,000 $ 10,000,000 $ 16,666,667 Common Stock Options $ - $ - $ 250,000 $ 500,000 $ 2,375,000 $ 4,041,667 Total Value $ 6,000,000 $ 7,375,000 $ 10,375,000 $ 12,375,000 $ 34,875,000 $ 49,875,000 Exercise Proceeds $ - $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 Total After Exercise Proceeds $ 6,000,000 $ 7,500,000 $ 10,500,000 $ 12,500,000 $ 35,000,000 $ 50,000,000 Cumulative Value per Outstanding Shares Equity Class No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 Series B Preferred Stock $ $ $ $ $ $ Series A Preferred Stock $ $ $ $ $ $ Common Stock $ - $ $ $ $ $ Common Stock Options $ - $ - $ $ $ $ Breakpoint No. 1: Preferred stock liquidation preference Breakpoint No. 2: Common stock options exercise Breakpoint No. 3: Series A preferred stock reaches participation cap Breakpoint No. 4: Series A preferred stock converts to common stock Breakpoint No. 5: Series B preferred stock reaches participation cap Breakpoint No. 6: Series B preferred stock converts to common stock 47

48 Example II: Option Pricing Method Black-Scholes-Merton Option Pricing Model Assumptions Total No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 End Underlying Asset Value (1) $ 13,254,527 $ 13,254,527 $ 13,254,527 $ 13,254,527 $ 13,254,527 $ 13,254,527 $ 13,254,527 Exercise Price (2) $ 6,000,000 $ 7,375,000 $ 10,375,000 $ 12,375,000 $ 34,875,000 $ 49,875,000 Term (3) Expected Volatility (4) 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Risk-free Rate (5) 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% N(d1) N(d2) Value of Call Option $ 13,254,527 $ 10,061,522 $ 9,618,682 $ 8,814,951 $ 8,369,379 $ 5,530,736 $ 4,562,819 Incremental Option Value $ 3,193,005 $ 442,840 $ 803,732 $ 445,572 $ 2,838,643 $ 967,917 $ 4,562,819 Breakpoint Participation Percentages Equity Class No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 End Series B Preferred Stock 83.3% 27.3% 25.0% 37.5% 25.0% 0.0% 25.0% Series A Preferred Stock 16.7% 36.4% 33.3% 0.0% 33.3% 44.4% 33.3% Common Stock 0.0% 36.4% 33.3% 50.0% 33.3% 44.4% 33.3% Common Stock Options 0.0% 0.0% 8.3% 12.5% 8.3% 11.1% 8.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Allocation of Incremental Option Value Equity Class Total No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 End Series B Preferred Stock $ 5,000,000 $ 2,660,838 $ 120,775 $ 200,933 $ 167,089 $ 709,661 $ - $ 1,140,705 Series A Preferred Stock $ 3,858,450 $ 532,168 $ 161,033 $ 267,911 $ - $ 946,214 $ 430,185 $ 1,520,940 Common Stock $ 3,549,068 $ - $ 161,033 $ 267,911 $ 222,786 $ 946,214 $ 430,185 $ 1,520,940 Common Stock Options $ 847,009 $ - $ - $ 66,978 $ 55,696 $ 236,554 $ 107,546 $ 380,235 Total $ 13,254,527 $ 3,193,005 $ 442,840 $ 803,732 $ 445,572 $ 2,838,643 $ 967,917 $ 4,562,819 48

49 Example II: Allocation Summary Allocation Summary Equity Class Shares Aggregate Value Value Per Share Discount for Lack of Control Minority, Marketable Value Discount for Lack of Marketability Fair Market Value Series B Preferred Stock 750,000 $ 5,000,000 $ 6.67 $ 6.67 $ 6.67 Series A Preferred Stock 1,000,000 $ 3,858,450 $ 3.86 $ 3.86 $ 3.86 Common Stock 1,000,000 $ 3,549,068 $ % $ % $ 2.48 Common Stock Options 250,000 $ 847,009 $ 3.39 $ 3.39 $ 3.39 Total 3,000,000 $ 13,254,527 49

50 Example Summary Calculation Results Post-money $ 6.67 OPM Allocation Example I $ 3.21 OPM Allocation Example II $ 2.48 Observations: Employing a more quantitative allocation analysis that captures the economic differences between the various equity classes typically results in a measurable difference in value, compared to the post-money calculations (Post-money vs. Example I or II) Ensuring that the economic rights of each equity class are appropriately modeled is critical (Example I vs. Example II) 50

51 SPEAKER BIOGRAPHIES

52 Sidney Burke, DLA Piper Sidney Burke DLA Piper Partner New York, NY T: Sid Burke, a partner based in New York, has a varied corporate and securities practice. He advises private equity and mezzanine funds in structuring, negotiating and executing portfolio company investments and financings, and counsels funds in their formation and internal governance. He also represents public companies on an ongoing basis, providing advice concerning mergers, acquisitions, dispositions and joint ventures, corporate governance, disclosure and securities regulations. Mr. Burke's transactional experience includes: Acquisitions and dispositions of public companies, private companies and various business divisions; Private equity fund formation; High-yield debt offerings; Mezzanine financings; and Bridge loan financings. 52

53 Rita Patel, DLA Piper Rita Patel DLA Piper Partner Washington, D.C. T: Rita Patel advises clients on employee benefits, executive compensation, and business tax matters. Her experience includes designing and analyzing a broad range of qualified and nonqualified retirement and deferred compensation plans for public and private companies and tax-exempt entities. She has considerable experience advising clients in the correction of plan failures under IRS and Department of Labor correction programs. In addition, Ms. Patel provides guidance regarding welfare plans including multiple employer welfare arrangements. Ms. Patel's broad practice also covers the design and administration of stock option, stock purchase and restricted stock agreements and counseling regarding securities laws as they relate to such equity-based arrangements. Related to Ms. Patel's benefits practice, she represents tax-exempt entities including public charities, private foundations, social welfare organizations and trade associations in all types of tax matters. She has experience on various tax-exempt matters including the application of the private foundation excise taxes and the limitations on political activities, UBIT issues, intermediate sanctions, public disclosure requirements, and private inurement and private benefit issues. Prior to joining the firm, Ms. Patel worked for the US Department of Justice through its Attorney General's Honor Program. Through this program, Ms. Patel practiced immigration law first as a US Immigration Court clerk and then as an attorney with the Executive Office for Immigration Review. Ms. Patel has continued to assist immigration clients through the firm's pro bono asylum program. 53

54 Lynn Sommer, Alvarez & Marsal Lynn Sommer Alvarez & Marsal Valuation Services Senior Director New York, NY T: Lynn Sommer is a Senior Director with Alvarez & Marsal Valuation Services in New York. She has significant experience in the provision of transaction related valuation opinions and analyses for both public and closely held companies, including fairness opinions, solvency opinions and strategic alternatives analyses. With more than 12 years of valuation experience, Ms. Sommer s knowledge spans advisory and financial reporting valuation engagements across a number of industries, including real estate, telecommunications, technology and financial institutions. Ms. Sommer is a frequent guest panelist and lecturer at conferences, seminars and in valuation classes, on topics of valuation, strategic alternatives and trends in fairness opinions and the private capital markets. Prior to joining A&M, Ms. Sommer was a Senior Manager at Ernst & Young in the Valuation & Business Modeling group in New York. She also served as a Vice President in the Los Angeles office of the financial advisory services department for Houlihan Lokey, a middle-market international investment bank, primarily providing fairness and solvency opinions. Ms. Sommer earned a bachelor s degree in economics from Colgate University and a master s degree in business administration from the Stern School of Business at New York University in New York. She is also a member of the New York Society of Security Analysts, the American Society of Appraisers for Business Valuation, and the Association for Corporate Growth in New York. 54

55 Mark McMahon, Alvarez & Marsal Mark McMahon Alvarez & Marsal Valuation Services Managing Director New York, NY T Mark McMahon is a Managing Director with Alvarez & Marsal Valuation Services in New York, where he leads the group s alternative investments services. He brings more than 17 years of experience and specializes in the valuation of illiquid securities and interests across various strategies and asset classes common to alternative asset managers. Mr. McMahon provides valuation advisory services primarily to private equity, hedge funds and business development companies (BDCs). He has performed valuations of portfolios of illiquid equity interests held by large buyout and middle market private equity funds, while his hedge fund and BDC experience includes the analysis of private loans, including senior secured, subordinated and mezzanine debt, as well as convertible preferred and common equity, warrants and other derivatives. Mr. McMahon's experience also includes the valuation of underlying portfolio companies for private equity funds, as well as management, carried interest and incentive fee entities of private equity and hedge funds in connection with tax and management planning, purchase price allocations, impairment testing and restructurings under IRC 1060, IFRS 3, ASC 805 and ASC 350. Before A&M, Mr. McMahon was a managing director in the alternative asset advisory practice of Duff & Phelps. He has also held positions in the fields of corporate finance, investment advisory and corporate value consulting. Mr. McMahon earned a master's degree in business administration from New York University's Leonard N. Stern School of Business and a bachelor's degree from the University of Richmond's E. Claiborne Robins School of Business. He is a Chartered Financial Analyst (CFA) charter holder and member of the CFA Institute, the New York Society of Security Analysts, and the American Society of Appraisers. 55

56 Jason Andrews, Alvarez & Marsal Jason Andrews Alvarez & Marsal Valuation Services Manager Seattle, WA T Jason Andrews is a Manager with Alvarez & Marsal Valuation Services. He specializes in the valuation of public and closely-held business and business segments, financial instruments, and related matters for financial statement reporting, tax reporting, corporate planning, litigation support, and other purposes. Mr. Andrews primary areas of concentration are providing valuations of early stage and venture-backed companies, share-based compensation, financial instruments and derivatives, including options, warrants, convertible securities, swaps, market and performance based stock awards, and various embedded derivatives, for financial statement and tax reporting purposes. Mr. Andrews has been involved with research and valuing companies in a variety of industries, including energy, aerospace, biotechnology and pharmaceutical, Internet, software, and a variety of other technology segments. Prior to joining A&M, Mr. Andrews spent four years with Grant Thornton, where he most recently served as manager in the forensic and valuation services practice. Before Grant Thornton, he was a pricing analyst at Speakeasy, Inc., and a business analyst with The Boeing Company. Mr. Andrews earned a bachelor of arts in business administration, with a finance concentration, from the University of Washington. Mr. Andrews has co-presented the Business Valuation Resources Advanced Workshop on Monte-Carlo Simulations in March 2012 and the 2012 Congress of Fair Value AICPA Task Force s Update: Cheap Stock in February

57 THANK YOU