1. Afif Khoury Managing Member, Scatter Ventures LLC CEO, SOCI Inc. CA Bar Patent Bar UCSD Grad 10+ yrs Venture Capital, Corporate Governance Law afif@scatterventures.com How to Value a Start-Up… for Venture Capital

2. The Scorecard Method The Venture Capital Method The Dave Berkus Method The Risk Factor Summation Method The Golden Rule Multiple Methods

3. The rules can be subjective Even more “standard” formulas may yield dramatically different results. Strength of the Team Size of the Opportunity Product/Technology Competitive Environment Marketing/Sales Channels/Partnerships Need for Additional Investment Regulatory Climate Trends By the time you are through answering these questions … Subjectiveness

4. The Scorecard Method 1.Determine the Avg Pre Money valuations: Look at companies in the region and business sector of target co. Assume $2N 2.Compare Target to your perception of similar deals : Strength of Management Team0-30% Size of Opportunity0-25% Product/Technology0-15% Competitive Environment0-10% Marketing/Sales Channels/Partnerships0-10% Need for Additional Investment0-5% Other0-5%

5. The Scorecard Method 3. Make the Valuation Calculation 4. Multiply the sum by the Avg: $2M*1.075 = $2.15 Comparison FactorRangeTarget CoFactor Strength of Management Team0-30%125%0.375 Size of Opportunity0-25%150%0.375 Product/Technology0-15%100%0.150 Competitive Environment0-10%75%0.075 Marketing/Sales Channels/Partnerships0-10%80%0.080 Need for Additional Investment0-5%100%0.050 Other (great early customer feedback)0-5%100%0.050 Total1.0750

6. LEXICON Pre-Money: Value assigned before the investment Post-Money: – Pre-Money + Investment – Terminal Value / Anticipated ROI Terminal Value: Anticipated Selling Price Anticipated Selling Price: – Industry specific multiple of revenues (2x Expected Revenues) – Expected Revenues in yr of sale (eg, $20M), which allows you to estimate earnings in the yr of sale from industry specific stats (eg, 15%, $3M earnings), which allows you to use industry specific P/E ratios to determine Terminal Value (eg, 15x)… $45M Anticipated ROI: 27% IRR in 6 yrs (“Wiltbank Stud”)… – so need a 20x or more on 1 of 10 (assuming other 9 pay back capital) The Venture Capital Method

7. What is the Pre-Money Valuation? Post Money = Terminal Value / Anticipated ROI $45M/20x… $2.125M Pre Money = Post Money - Investment If investment is $500K, Pre Money is $1.625M

8. The Venture Capital Method What If Subsequent Investment Will Be Needed? Another layer of complexity and subjectiveness Pre Money x Anticipated Dilution New money dilutes 50%, then Pre Money is ~ $800K

9. The Dave Berkus Method Dave Berkus is a founding member of the Tech Coast Angels in Southern California Missing some characteristics: competitive environment, IP, size of opportunity, etc. Doesn’t allow for pre-money higher than $2.5M CharacteristicAdd to Pre-Money Valuation Quality Management TeamZero to $0.5 million Sound IdeaZero to $0.5 million Working PrototypeZero to $0.5 million Quality Board of DirectorsZero to $0.5 million Product Rollout or SalesZero to $0.5 million

10. The Risk Factor Summation Method Ohio TechAngels: The higher the # of risk factors, the higher the overall risk Management Stage of the business Legislation/Political risk Manufacturing risk Sales and marketing risk Funding/capital raising risk Each risk (above) is assessed, as follow: +2 very positive for growing the company and executing a wonderful exit +1 positive 0 neutral -1 negative for growing the company and executing a wonderful exit -2 very negative Add $250K for every +1, and subtract $250K for every -1 Competition risk Technology risk Litigation risk International risk Reputation risk Potential lucrative exit

11. The Golden Rule He who has the gold, makes the rules There is a market standard There is an expectation on ownership Breaking the mold is hard… create competition!