262 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
The valuation concept is a company’s value as established primarily by the
income it can be expected to earn on an ongoing annual basis, in relation-
ship to a capitalization rate measuring ROR, investment risk, and potential
earnings growth (Figure13.6).
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13.5.3.1 Assumptions
Fair Value Standard of Value. “Standard of value,” as it is generally dened
for business valuation purposes, is the fundamental way in which the
value of a business or ownership holding will be established, based on the
purpose of the valuation. For the subject valuation, the standard of value
being employed is “fair value,” which is an opinion as to what is fair from a
nancial point of view as dened by law and precedent.
Net Income. “Earnings” for the method have been dened as “Net Income.”
The value used in the method is the one-year extension of a straight-line
trend based on ve historical years rounded to the nearest $1,000.
Net Income Capitalization Rate. A capitalization rate is a rate of return
divisor used for converting an earnings value into an investment value. The
25.0% capitalization rate used here is a 28.0% ROR reduced by 3.0% for
expected future earnings growth. Reducing the capitalization rate for the
expected future earnings growth is mathematically equivalent to adjusting
the earnings value for growth in perpetuity.
Discount for Lack of Marketability of 25.0%. A discount for lack of mar-
ketability is a recognized business valuation concept and, as dened in
the International Glossary of Business Valuation Terms, is “an amount or
• Magnitude of investment; market potential
• Staging of investment (early; first; mezzanine)
• Years to break even
• Syndication possibilities
• Target IRR
• Investment time horizon
• Terminal value of firm at exit
• % ownership required by VC partners
• Deal structure (board seat; management)
VC investment criteria at-a-glance
Figure 13.6 VC investment criteria—How do venture capitalists think?