If you are a CEO or a CFO of a high growth startup, it is vital to understand how to value your company correctly. Here is a quick list of questions this workshop will help you answer: Do you offer or are you planning to offer your employees stock options? Do you know the difference between ISOs and non-ISOs? Do you understand the general valuation concepts and approaches that the IRS has outlined, especially as they apply to early-stage companies? Did you know that if you run afoul of the 409A rules, your employees could have an unpleasant tax surprise and that some of that responsibility could revert back to you as the employer? Do you know if and when you need to engage an outside expert to assist with a valuation? If you need answers to any of these questions, join us for our workshop where a comprehensive document will also be provided to guide you through this process.

1. MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS © 2010 Wolf & Company, P.C.
Know Your Valuation For Equity
Compensation (and Avoid the
Perils of 409A)
Exclusively for

2. 2
Introductions
• Scott Goodwin – Wolf & Company, PC
– Member of the Firm
– Technology Services Team Leader
– TCN board of directors and program committee chair
• Zak Nugent – Scalar Analytics
– Chief Executive Officer
– Overseen more than 2,000 valuations engagements
– Board Member of Excalibur Industries, Inc.

3. 3
Who is Wolf & Company?
• Boston based, regionally focused
• 19 owners and 200 professionals in three offices
• Niche focused
– Technology Services Team
• Provide our clients with direct access to owner-level
expertise
• Ability to grow with you

4. 4
Who is Scalar Analytics?
• International valuation firm
– Tax, Financial Reporting, Transaction Advisory, Litigation
Consulting
• Performed more than 3,500 valuation engagements
– VC/PE backed companies, VC/PE funds, public companies
• Industry expertise in technology, life science, and
consumer product companies

5. 5
Agenda
• Overview of stock compensation plans
• Overview of IRC Section 409A
• The who, what, why and how of valuations
• Q&A

6. 6
Stock Compensation
Overview
• Common forms of stock compensation
– Founders shares
• Not really compensatory
• Beware of retroactive vesting provisions
• How long can you issue them?
• Other issues
– Founders coming and going

7. 7
Stock Compensation
Overview
• Common forms of stock compensation
– Option
• Incentive Stock Options (“ISOs”) – tax treatment
– No tax at issuance
– No tax upon vesting
– No tax upon exercise
– Only taxable upon sale of underlying stock
– Ability to get LT cap gain tax
• ISO criteria
– 8 criteria for being considered an ISO
– Three of the more important ones
» Issued under a formal written plan
» Exercise price >= FMV of stock
» Can’t be issued to non-employee

8. 8
Stock Compensation
Overview
• Common forms of stock compensation
– Options
• Non-quals (“NQs”) - tax treatment
– No tax at issuance
– Taxable income equal to the difference between FMV of the stock and the
exercise price
– Ordinary income
» Possible additional tax when stock sold
• Factors to consider when issuing options
– Tax advantages
– Less immediate dilution
– Keep stock in few hands for longer
– Difficult to value and account for

9. 9
Stock Compensation
Overview
• Common forms of stock compensation
– Restricted stock
• Generally common stock with vesting or repurchase rights
• General tax treatment
– Taxed as the shares vest
– Taxable amount based on FV of shares on the date of vesting
– Ordinary income
• Factors to consider
– Can be tax advantages
» 83(b) elections
» Start LT cap gain clock ticking
– FV is easier to establish for a share of stock than an option
– Better understood by recipients
– True dilution
– End up with more shareholders
» Consideration when you want to pay vendors with shares. Do you want them as
shareholders?

10. 10
Overview of IRC
Section 409A
• What is it?
– Part of the IRC – issued by the IRS
• No impact on accounting rules
– Very comprehensive and far reaching impact/scope
– Regulation governing a wide array of non-qualified deferred
compensation arrangement, including options
• “Deferred compensation” – legally binding right to receive compensation in
one tax year that is or may be taxable in a subsequent tax year
– Reaction to perceived abuses from some earlier scandals
including the option back-dating scandal

11. 11
Overview of IRC
Section 409A
• How does it impact stock compensation?
– Can no longer safely issue options using a rule-of-thumb or simple
board approval
– In-the-money options are impractical
– 409A has forced companies to get outside valuations of their
stock in order to appropriately set exercise prices
– 409A has forced companies to be more disciplined in their
granting process

12. 12
Overview of IRC
Section 409A
• What is the worst that could happen?
– An option issuance intended as an EE benefit could cause tax
problems for the recipient
– Lose the tax benefits of ISOs
– EE’s perspective
• Ordinary income in the periods in which options VEST rather than when they
are exercised
• Regular tax rates (rather than cap gains)
• 20% penalty
• Possible interest and penalties for late payment or underpayment
– ER’s perspective
• Very unhappy employees!
• Withholding obligation
• ER portion of employment taxes
• Possible responsibility for EE’s portion of withholdings
• Possible legal liability if sued by EE

13. 13
Overview of IRC
Section 409A
• What do you as an entrepreneur need to know to
stay out of trouble?
– With respect to options
• ISOs
– These have always been required to be recorded at FV so 409A really didn’t
change anything
– But did provide some guidelines that should be followed related to valuation
• Non-quals
– Will need to deal specifically with 409A
– General 409A compliance requirements
• Exercise price >= FMV of underlying common stock at grant date
• FMV must be determined by the “reasonable application of a reasonable
valuation methodology”

14. 14
Overview of IRC
Section 409A
• What do you as an entrepreneur need to know to
stay out of trouble?
– General 409A compliance requirements
• “Reasonable valuation methodology” must include consideration of:
– Tangible and intangible assets
– PV of future cash flows
– MV of the stock of similar companies
– Recent transactions
– Appropriate premiums and discounts
» Together, referred to as the “General Rule”
• Must be within 12 months of when valuation is being used
– Or more frequently based on a “significant events” in the business
– Safe Harbor Valuation Methods
• Safe harbors are not a “silver bullet”
– Shifts the burden of proof from you to the IRS related to valuation
– May only be rebutted by the Internal Revenue Service if the company's application
of the method is found to be "grossly unreasonable."

15. 15
Overview of IRC
Section 409A
• What do you as an entrepreneur need to know to
stay out of trouble?
– Safe Harbor Valuation Methods
• Independent appraisal
– Using the standard valuation methodologies
• Illiquid start-up
– Uses valuation factors outlined in General Rule
– Written report
– Company less than 10 years old
– Valuation performed by someone with significant experience, education and
training in this area (>= 5 years)
» CFO
» CEO
» Investment banker
– Reasonable expectation that no change in control within 90 days or IPO within 180
day

16. 16
Overview of IRC
Section 409A
• What do you as an entrepreneur need to know to
stay out of trouble?
– Safe Harbor Valuation Methods
• Binding formula
– Use formula based on book value, multiple of earnings or combination
– Stock transfers must be restricted
– All transactions must use the same binding formula

17. 17
Overview of IRC
Section 409A
• What are best practices at various stages of
development?
– Founding stage
• Founders stock and restricted stock more frequently than options
• Using general valuation factors is impractical due to limited amount of
information, operating history, etc.

18. 18
Overview of IRC
Section 409A
• What are best practices at various stages of
development?
– Start-up
• Friends and family or some angel financing
• Option issuances start
– Companies are looking at the cost/benefit of getting a valuation
– Depends on your and the BODs risk tolerance
• If using Illiquid Start-up safe harbor
– Document qualification of person performing the calc
– Consult outside resources
– Get BOD approval and document
– For as long as you’re using the value, consider impact of events that may have
changed the value
• Be aware of possibility of changes in control in the near term

19. 19
Overview of IRC
Section 409A
• What are best practices at various stages of
development?
– Post-start up
• Venture financing, decent amount of revenue
• Almost all companies are opting for a formal outside valuation
• Updated annually
– Possibly mid-year depending on what developments take place during the year
• More likely to have changes in control at this stage
– Other things to keep in mind
• There has not been any case law in this area yet so how 409A will be applied
to options in practice is still unclear
• Modifications to options can trigger new 409A consideration
• In acquisition situation, don’t be surprised to be asked for documentation of
compliance with 409A

20. Overview of a 409A Valuation
1. Determine equity value
of company
2. Determine the value of
each class of securities
3. Valuation discount
(Discount for lack of
marketability)
20
Fair Market Value of Enfield Tennis Academy, Inc. as of August 15, 2015 Market Value of Method Weighted
In actual dollars Invested Capital Weighting Value
Public Comps Valuation (Market) $15,800,000 50.0% $7,900,000
Acquisition Comps Valuation (Market) $16,000,000 50.0% $8,000,000
Weighted Market Value of Invested Capital $15,900,000
Less Debt ($1,088,998)
Weighted Equity Value $14,811,002
Value per Common Share (marketable, minority basis) $0.408
Discount for Lack of Marketability 40.0%
Value per Common Share (non-marketable, minority basis) $0.24
Total Option Value Value Total Shares Share Value DLOM* Adjusted Value
Series A $9,026,540 22,000,000 $0.410 0.0% $0.410
Common $220,418 540,000 $0.408 40.0% $0.245
A Warrants $571,454 1,400,000 $0.408 40.0% $0.245
Options $4,892,590 12,000,000 $0.408 40.0% $0.245
Total $14,711,002 35,940,000

21. 21
Overview of a 409A Valuation
Factors to consider in performing a valuation:
▪ Date of valuation
▪ Stage of enterprise development
▪ Milestones achieved by the company
▪ Financial condition and cost structure
▪ Expected timing and nature of an exit
▪ Risks factors inherent to the industry and the enterprise
▪ Enterprise business model, management, workforce, IP, products and
services
▪ Competition and market dynamics
▪ Strategic relationships
▪ Major investors in the enterprise
▪ State of the industry and the economy

22. 22
Overview of a 409A Valuation
Stages of enterprise development
▪ These serve as an indicator of which valuation approach(es) may generally be
more appropriate
▪ Defined in terms of operational development
▪ Financing patterns are approximate since different industries usually follow
distinct financing sequences and timings
▪ Risks usually decreases on each subsequent stage
▪ Expectation of a liquidity event in later stages
▪ Some enterprises follow different patterns or skip stages, e.g. life sciences
companies, or family-owned enterprises which elect to run the company
indefinitely privately

23. 23
Overview of a 409A Valuation
1 2 3 4 5 6
Enterprise has no
product revenue to
date and limited
expense history,
and, typically, an
incomplete
management team
with an idea, plan,
and possibly some
initial product
development.
Typically, seed
capital, or first-
round financing is
provided during
this stage by friends
and family, angels,
or venture capital
firms focusing on
early-stage
enterprises, and
the securities
issued to those
investors are
occasionally in the
form of common
stock but are more
commonly in the
form of preferred
stock.
Enterprise has no
product revenue
but substantive
expense history,
because product
development is
under and business
challenges are
thought to be
understood.
Typically, a second
or third round of
financing occurs
during this stage.
Typical investors
are venture capital
firms, which may
provide additional
management or
board of directors’
expertise. The
typical securities
issued to those
investors are in the
form of preferred
stock.
Enterprise has
made significant
progress in product
development; key
development
milestones have
been met (for
example, hiring of a
management
team); and
development is
near completion
(for example alpha
and beta resting),
but generally, there
is no product
revenue. Typically,
later rounds of
financing occur
during this stage.
Typical investors
are venture capital
firms and strategic
business partners.
The typical
securities issued to
those investors are
in the form of
preferred stock.
Enterprise has met
additional
development
milestones (for
example, customer
orders or revenue
shipments) and has
some product
revenue, but it is
still operating at a
loss. Typically
mezzanine
financing rounds
occur during this
stage. Also, it is in
this stage that
discussions would
start with
investment banks
for an initial public
offering (IPO)
Enterprise has
product revenue
and has recently
achieved
breakthrough
measures of
’financial success,
such as operating
profitability or
breakeven or
positive cash flows.
A liquidity event of
some sort: such as
an IPO or a sale of
the enterprise
could occur in this
stage. The form of
securities issued is
typically all
common stock,
with any
outstanding
preferred
converting to
common upon an
IPO (and perhaps
also upon other
liquidity events).
Enterprise has an
established
financial history of
profitable
operations or
generation of
positive cash flows.
Some enterprises
may remain private
for a substantial
period in this stage.
An IPO could also
occur during this
stage.
Stages of enterprise development

24. 24
Valuation Methodologies
▪ Each approach can have several techniques
▪ Depending on the company and factors considered for its valuation, some
methods will be more appropriate than others
▪ Estimated values under different methods may or may not converge in a tight
range of values
▪ One or more methods may corroborate and/or provide a “sanity check” for a
preferred valuation approach.
Market Approach Income Approach
Cost/Asset Approach
There are three main methodologies that can be utilized to value a company:

25. 25
Valuation Methodologies
Market Approach
Comparable
Public
Companies
Comparable
Transactions
Recent
Company
Securities
Transactions

26. 26
Valuation Methodologies
▪ Infers value from multiples
calculated from market prices
and financial metrics of publicly
traded companies
▪ Applies those multiples to the
corresponding subject company
metrics to arrive at the implied
value of the enterprise
Market Approach
Comparable Public Companies
Multiples and Performance Enterprise Value
LTM Revenue LTM EBITDA NTM Revenue NTM EBITDA
11
Comparable Public Companies
Accenture plc 2.0x 1 12.4x 1 1.9x 1 11.2x 1
Cognizant Technology Solutions Corporation 3.2x 1 16.1x 1 2.8x 1 14.5x 1
WPP plc 1.8x 1 9.4x 1 1.7x 1 10.4x 1
Omnicom Group Inc. 1.4x 1 9.6x 1 1.4x 1 9.5x 1
IHS Inc. 4.6x 0 19.1x 1 4.4x 0 13.8x 1
The Interpublic Group of Companies, Inc. 1.3x 1 10.0x 1 1.3x 1 9.3x 1
Acxiom Corporation 1.5x 1 10.2x 1 1.9x 1 11.7x 1
MDC Partners Inc. 1.5x 1 13.2x 1 1.4x 1 9.6x 1
PFSweb Inc. 1.0x 1 13.8x 1 0.8x 1 11.6x 1
Edgewater Technology Inc. 0.6x 1 12.7x 1 0.5x 1 6.1x 1
Innodata Inc. 0.7x 1 N/A 0 N/A 1 N/A 1
Median 1.4x 12.6x 1.4x 10.8x
Mean 1.5x 12.7x 1.5x 10.8x
75th Percentile 1.7x 13.7x 1.9x 11.6x
25th Percentile 1.1x 10.1x 1.3x 9.5x
In thousands of dollars (000) LTM Revenue LTM EBITDA NTM Revenue NTM EBITDA
Enfield Tennis Academy, Inc. $7,850.0 $529.6 $14,105.7 $2,552.7
Median Multiple 1.4x 12.6x 1.4x 10.8x
Implied Enterprise Value $11,301.3 N/A $19,468.6 N/A
Average Enterprise Value $15,385.0 NTM Rev Disc. 4.1%
Plus: Cash $436.9
Market Value of Invested Capital $15,821.9
Market Value of Invested Capital (Rounded) $15,800.0

27. 27
Valuation Methodologies
▪ Infers value from multiples calculated
from total transaction prices and
financial metrics of merger and
acquisitions of comparable
companies
▪ Applies those multiples to the
corresponding subject company
metrics to arrive at the implied value
of the enterprise
▪ In some cases the companies
involved may be more comparable in
terms of size and development stage
to the valuation subject, than public
companies
Market Approach
Comparable Transactions
Transaction Multiples Analysis Implied LTM LTM LTM Revenue LTM EBITDA
Date Target Name EV Revenue EBITDA Mutliple Multiple
23
Comparable Precedent Transactions
02/12/15 Digital River Inc. $645.8 $375.3 $35.7 1.7x 1 18.1x 1
02/05/15 Sapient Corp. $3,376.4 $1,383.1 $176.1 2.4x 1 19.2x 1
12/10/14 Conversant, Inc. $2,365.3 $593.8 $197.7 4.0x 1 12.0x 1
11/03/14 Dodge Data & Analytics, Inc. $320.0 $170.0 $0.0 1.9x 1 N/A 1
09/30/14 Tire Company Solutions, LLC (nka:TCS Technologies, LLC) $9.3 $5.2 $0.7 1.8x 1 13.8x 1
09/15/14 Mobilethink A/S $20.0 $8.2 $0.0 2.4x 1 N/A 1
09/05/14 X Plus One Solutions, Inc. $236.0 $71.7 $0.0 3.3x 1 N/A 1
09/01/14 ExciteAd Digital Marketing Ltd $19.0 $12.8 $0.0 1.5x 1 N/A 1
08/15/14 RCTW, LLC $15.2 $0.2 ($0.7) 72.8x 0 N/A 1
01/31/14 Macromill, Inc. $427.3 $170.2 $42.3 2.5x 1 10.1x 1
12/13/13 Interactive Prospect Targeting Limited $3.2 $14.5 $0.0 0.2x 1 N/A 1
11/01/13 EMediate ApS $10.0 $5.9 $1.2 1.7x 1 8.2x 1
10/02/13 Sedo Holding AG $100.7 $187.7 $7.5 0.5x 1 13.5x 1
09/30/13 Arbitron Inc. $1,293.5 $445.3 $130.5 2.9x 1 9.9x 1
07/22/13 Neolane SAS (nka:Adobe Campaign, SAS) $616.5 $58.2 $0.0 10.6x 0 N/A 1
07/08/13 Acquity Group Limited $284.9 $140.3 $20.4 2.0x 1 13.9x 1
07/01/13 SoundBite Communications, Inc. $76.7 $48.2 $0.3 1.6x 1 250.6x 0
05/16/13 Branded3 Search Limited Company $36.2 $6.3 $2.6 5.8x 1 13.9x 1
02/06/13 Travora Networks, Inc. $5.3 $10.9 ($13.2) 0.5x 1 N/A 1
11/26/12 DDSB (M) Sdn Bhd. $17.7 $4.5 $0.0 4.0x 1 N/A 1
06/15/12 LABEL.ch SA (nka:Emakina.CH) $2.0 $4.7 $0.0 0.4x 1 N/A 1
06/04/12 Red Bricks Media, Inc., Hong Kong Operations $0.0 $0.0 $0.0 N/A 1 N/A 1
05/31/12 MarketNet, Inc. $1.3 $2.7 $0.0 0.5x 1 N/A 1
Median 1.8x 13.7x
Mean 2.1x 13.3x
75th Percentile 2.6x 13.9x
25th Percentile 1.2x 10.6x
In thousands of dollars (000) LTM Revenue LTM EBITDA NTM Revenue NTM EBITDA
Enfield Tennis Academy, Inc. $7,850.0 $529.6 $14,105.7 $2,552.7
Median Multiple 1.8x 13.7x 1.8x 11.8x
Implied Enterprise Value $14,474.4 N/A $24,934.8 N/A
Average Enterprise Value $19,704.59
Less: Debt $1,089.0
Market Value of Equity (Controlling) $18,615.6
Discount For Lack of Control 22.5%
Market Value of Equity (Non-Controlling) $14,429.7
Plus: Debt $1,089.0
Average Enterprise Value (Non-Controlling) $15,518.7
Plus: Cash $436.9
Market Value of Invested Capital $15,955.6
Market Value of Invested Capital (Rounded) $16,000.0

28. 28
Valuation Methodologies
▪ Infers value from recent events involving
the sale of the subject company securities
▪ Preferred equity financing rounds
▪ Convertible debt
▪ Stock repurchases
▪ Secondary sales
▪ Offers to acquire the company
▪ Might consider events in the near future if
there is a high degree of certainty the sale
will occur and there is enough information
to determine prices
Market Approach
Recent Security Transaction
Option Value Analysis Option 1 Option 2 Option 3
Definition: Prior to this Breakpoint…
Series A
Liquidation
Preference
Series A,
Common
Participation; A
Warrants
Exercise
Options
Exercise; All
Securities
Participate Pro
Rata
Breakpoints $0 $50,000 $62,100 Infinity
Current Equity Value (Price) $63,393 $63,393 $63,393 $63,393
Exercise Price $0 $50,000 $62,100 Infinity
Riskfree Rate 1.43% 1.43% 1.43% 1.43%
Maturity (in years) 5.0 5.0 5.0 5.0
Volatility 53% 53% 53% 53%
d1 35.01 0.86 0.67 (99.00)
d2 33.82 (0.34) (0.52) (100.19)
Call Option Value: $63,393 $33,837 $30,083 $0
Incremental Option Value: $0 $29,557 $3,753 $30,083

29. 29
Valuation Methodologies
Seeks to measure the future benefits that can be quantified in monetary
terms. Under this approach, the value of an enterprise is the aggregate of
all future net or free cash flows to be received by the company,
discounted to the valuation date.
The technique most widely utilized is the Discounted Cash Flow (DCF)
method.
Income Approach

30. 30
Valuation Methodologies
Income Approach
Forecasts all future cash
flows and the timing of
each
Discounts those values
to the valuation date
using an appropriate
discount rate

31. 31
Valuation Methodologies
• The underlying logic in theory would
provide an good estimation of value.
• However, the subjectivity
surrounding the needed inputs, make
this method more applicable to
companies in a later stage of
development.
• The method would be used when no
other applicable indication of value is
available for early stage companies.
Income Approach
Discounted Cash Flow
Free Cash Flow Summary Projections ending Dec 31,
In thousands of dollars (000) 2014 2015 2016 2017 2018 2019
Revenue $5,989.0 $9,989.0 $16,608.4 $25,500.0 $38,005.3 $50,460.3
Growth Rate 66.8% 66.3% 53.5% 49.0% 32.8%
Gross Profit $2,156.3 $3,015.7 $5,812.9 $9,180.0 $13,871.9 $18,670.3
Margin 36.0% 30.2% 35.0% 36.0% 36.5% 37.0%
EBITDA ($146.2) $1,561.1 $3,155.6 $5,355.0 $8,171.1 $11,101.3
Margin (2.4%) 15.6% 19.0% 21.0% 21.5% 22.0%
Depreciation & Amortization $0.0 $149.0 $309.6 $475.3 $708.4 $940.5
% of Sales 0.0% 1.5% 1.9% 1.9% 1.9% 1.9%
Capex & Additions to Intangibles $49.9 $74.7 $103.3 $138.5 $165.5
% of Sales 0.5% 0.5% 0.4% 0.4% 0.3%
EBITDA $1,561.1 $3,155.6 $5,355.0 $8,171.1 $11,101.3
Less: Depreciation & Amortization ($149.0) ($309.6) ($475.3) ($708.4) ($940.5)
EBIT $1,412.1 $2,846.0 $4,879.7 $7,462.8 $10,160.7
Less: Cash Taxes ($351.8) ($1,138.4) ($1,951.9) ($2,985.1) ($4,064.3)
Plus: Depreciation & Amortization $149.0 $309.6 $475.3 $708.4 $940.5
Less: Capex ($49.9) ($74.7) ($103.3) ($138.5) ($165.5)
Change in Working Capital ($47.1) ($271.3) ($286.9) ($394.8) ($418.1)
Unlevered Free Cash Flows (FCFs) $1,112.3 $1,671.1 $3,013.0 $4,652.7 $6,453.3
Cash Flows Remaining through EOY $420.5 $1,671.1 $3,013.0 $4,652.7 $6,453.3
Discount Periods (mid-year convention) 0.19 0.88 1.88 2.88 3.88
Present Value of FCFs $397.4 $1,285.1 $1,718.1 $1,967.3 $2,023.2
Total Present Value of Free Cash Flows $7,391.1
WACC 34.9%
Net Present Value of FCFs $7,391.1
Present Value of Terminal Value $11,266.1
Enterprise Value $18,657.2
Plus: Cash $436.9
Market Value of Invested Capital (Rounded) $19,100.0

32. 32
Valuation Methodologies
Cost Approach
Measures value based on the cost of replacing or reproducing an asset,
or groups and assets and liabilities such as an enterprise.
This method relies on historical data to estimate value. Alternatives
include:
▪ Book value of assets
▪ Invested capital.
It is almost solely applicable to very early stage companies, such as stage
1 and 2 of the AICPA characterization.

33. 33
Valuation Methodologies
Cost Approach
Invested Capital
Security name Price per share # of shares: Invested Capital
Series A $0.002 22,000,000 $50,000
Common - 540,000 -
A Warrants - 1,400,000 -
Options - 12,000,000 -
Option Pool - 6,000,000 -
50,000.00$

34. 34
Equity Allocation
Once the Enterprise value has been determined, the Equity
Value can be calculated by subtracting debt from it.
This Equity value is the measure that needs to be distributed
or allocated among all of the equity classes in the company.
Definition

35. 35
Equity Allocation
Methodologies
Current Value
Method (CVM)
• Assumes equity
value is distributed
as of the valuation
date among all
shareholders
according to their
respective rights
Probability Weighted
Expected Return
Method (PWERM)
• Models liquidity
scenarios at
different times in
the future
assigning a
probability of
occurring to each
Option Pricing
Method (OPM)
• The OPM treats
common stock and
preferred stock as
call options on the
value of the
enterprise,
accounting for all
classes’ rights and
seniority

36. 36
Valuation Adjustments
Discount for Lack of Marketability (DLOM)
Definition
The discount for lack of marketability reflects the lower value placed on
securities that are not freely transferable as compared to those that
trade frequently in an established market.
For two given investments identical in all other respects, market
participants will apply a downward adjustment to the value of the
one that cannot be readily converted into cash versus the one that can
be readily converted into cash.

37. 37
Valuation Adjustments
Discount for Lack of Marketability (DLOM)
Marketability and Liquidity
A nonmarketable investment is one that lacks a ready market; an illiquid
investment is one in which a market exists but the investment is not actively
traded or restrictions on the investment prevent access to that market.
▪ A private enterprise is marketable (there is a market) but illiquid (there is no
active market)
▪ A typical minority interest in a private enterprise is nonmarketable
▪ The investors’ securities and the enterprise as a whole can be considered to
be equally marketable:
▪ Enterprise value is defined in terms of the cash flows to the venture capital or private equity investors who in
aggregate have control over the business
▪ Although harder to sell, transaction of investors’ securities and enterprises as a whole do occur
▪ Investors typically have access to information that would allow them to take potential buyers through a due
diligence process, making it possible to access an exit market

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Valuation Adjustments
1. Protective Put
2. Longstaff
3. Quantitative Marketability Discount Model
Because the Longstaff method generally does not
provide a reasonable estimate for the discount for
lack of marketability and the QMDM is more
applicable for directly valuing a minority interest
in an entity with a simple capital structure, the
most widely accepted of these methods is the
protective put method.
We utilize two variations of the protective put
approach:
a. Basic Put Option Analysis
b. Asian Put Option (Finnerty Method)
Discount for Lack of Marketability (DLOM)
Methods to Estimate DLOM
Put Option Analysis - Common Stock
Basic put option approach for estimatingtheDLOM. Current Equity Value(Price) [s] 100%
Exercise[k] 100%
RiskfreeRate[r] 1.43%
Maturity (in years) [t] 5.0
Calculations Public ComparableVolatility [σ] 53.4%
(LN(s/k)+(r+(σ^2)/2)*t)/(σ*SQRT(t)) d1 0.656
d1 - σ*SQRT(t) d2 (0.537)
(k*EXP(-r*t))*NORMSDIST(-d2)-s*NORMSDIST(-d1) Discount for Lack of Marketability 40.0%
Selected Discount for Lack of Marketability: Put Option 40.0%

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QUESTIONS AND ANSWERS

40. 40
Thank You!
Scott Goodwin, CPA
sgoodwin@wolfandco.com
(617) 428-5407
Zak Nugent
zak.nugent@scalaranalytics.com
(801) 413-3930

41. 41
Resources
To be posted to TCN website:
• Detailed outline and PowerPoint presentation