Valuation Issues in Start-Ups and Early-Stage Companies: The Venture Capital Method

This note was written by Robert M Johnson, Lecturer in Entrepreneurship, as a basis for class discussion. The author is grateful to Thomas M. Claflin, President of Claflin Capital Management, for his input to this note.

Copyright D December 1997 Revised August 2004 London Business School. All rights reserved. No part of this case study may be reproduced, .-~on80nBusiness stored in a retrieval system, or transmitted in any form or by any means, reference electronic, mechanical, photocopying, recording or otherwise without CS97-012-04 written permission of London Business School.

The Valuation Dilemma

For an unquoted or privately held company, understanding valuation issues can be tricky. With a quoted company, the value of the company at a given point in time can be established with mathematical precision; however, with an unquoted company valuation is more an imprecise art than a mathematical exercise.

Yes, one tries to use traditional valuation methods and comparables from quoted companies in calculating possible values for an unquoted company, but there remains a major element of judgement once all of the calculations have been made. And with start-ups and early-stage companies - where the underlying data are not so useful, especially when the company has nominal sales and questionable forecasts, or has consistently lost money throughout its early stages, or is just an idea on paper - the traditional methods simply may not work.

Investors have wrestled with this dilemma for ages, and in the last few decades many have come to rely on a valuation technique known as the venture capital method as one way to calculate the value of such a business, based on the way the company is financed.

The Rationale

The venture capital method is based on three underlying premises. First, venture capitalists think in terms of the total value of a company, especially early-stage companies, rather than in terms of pricelearnings ratios ('PIES') or price per share. The logic of such thinking will become clear below. Second is the recognition that 'valuation' is not an abstract notion, independent of any particular perspective. The value of any asset - whether a business or a work of art - depends on the party(ies) to whom the value accrues. Third is the implicit value placed on a company when someone invests in it. Value is crystallised

when two parties complete a transaction. The venture capital method uses these principles to help one understand how investors are valuing a company.

It is important to be clear about how one is using the term 'value' in this context. When a transaction takes place between a willing buyer and a willing seller, that transaction establishes a value for the enterprise. With a quoted company such transactions occur every day, even every minute; for an unquoted company they occur much less frequently and indeed may happen only once in many years. The value established by such transactions is offen referred to as the 'transaction value' or 'price'.

Prior to such a transaction. however, each interested party will have determined, in his or her own way, what that unquoted company is worth to them. This value, which may be thought of as the 'inherent value' for that person, gives the person a basis for negotiating a transaction. Different people, depending on their individual assessments of and future expectations or plans for a company, will arrive at different inherent values for a given company. The interplay of these divergent views underlies the negotiating process that ultimately leads to a transaction. In this way the transaction value emerges from one's estimate of the inherent value of a company. (Indeed when one starts by determining the price one expects to have to pay and then assumes that this price reflects the inherent value, the result can be disastrous.)

Venture capitalists follow this process when dealing with start-ups and early- stage companies - first, determining the inherent value of the business and then structuring a financing proposition around this value. The venture capital method is the tool venture capitalists use to measure the expected andlor resulting transaction value.

Valuation Issues in Start-ups and Early- 2 Stage Companies: The Venture Capital Method

The Venture Capital Method

Assume that a venture capitalist has identified a specific start-up company that he is interested in backing. Following discussions with the entrepreneur it is agreed that the company should be valued at £800,000 before the financing takes place. (We will see in a later section how such a valuation may be reached.)

The company needs to raise £450,000. and the investor offers to make the investment. Assuming that the funds are invested in ordinary shares, the value after the financing is:

The investor would then be entitled to ordinary shares equalling:

£450,000 / £1,250,000 = 36% of the company

In this example, the £1,250.000 valuation is referred to as the post-financing valuation (sometimes called 'post-money valuation') and includes the cash that has just been invested in the company. The £800,000 valuation prior to the financing is referred to as the pre-financing valuation (or 'pre-money valuation'). The investment decision for the venture capitalist and the negotiation with the entrepreneur centre on: (i) the perceived value of the company before the financing (the pre-financing valuation) and (ii) the amount of money that the company is raising.

If, for example, the entrepreneur decided to raise £600,000 instead of £450,000, then the post-financing valuation would be £800,000 + £600,000 = £1,400,000, and the investor would be entitled to shares equalling:

£600,000/£ 1,400,000 = 43% of the company

On the other hand, if the entrepreneur can convince the investor that the company is worth £1,200,000 (rather than £800,000) prior to the £600,000 financing, then the post-financing valuation becomes £ 1,200,000 + £600,000 = £1,800,000 and the investor is entitled to shares equalling:

£600,000 / £ 1,800,000 = 33% of the company

As one can see, the starting point is the pre-financing valuation. (Implicit in the calculations above is that at the time of the investment, the other 67 percent of the equity should be valued on the same basis as this new investment.) The ownership percentages then 'fall out' from the amount of money that is raised.

'Reverse Engineering' to Determine Valuations

In making an investment proposal to a company, a venture capitalist will state what percentage ownership he expects in return for the investment. The venture capital method is helpful in understanding such an offer.

Similarly, investors often find themselves looking at situations where there has already been at least one other round of financing in the company. Here, too, the venture capital method helps not only in establishing boundaries for valuing a company but also in understanding and comparing different rounds of financing for the company.

Returning to the example above, assume that there has not been a discussion specifically about valuation and the vehture capitalist offers to invest the £450,000 required by the company in return for 40 percent of the equity. The total value of the equity in the company following the new investment can be calculated as follows:

Valuation Issues in Start-ups and Early- 3 Stage Companies: The Venture Capital Method

[amount invested / % of equity purchased = post-financing valuation]

The pre-financing valuation - the implied value of the equity immediately prior to the new investment - can then be calculated as follows:

[post-financing valuation - amount invested

= pre-financing valuation]

Thus the entrepreneur would know that the venture capitalist is valuing the company at £675,000 before the financing. This becomes important to understand, as discussed later, especially when comparing different offers which contain very different terms.

The interplay of pre-financing and post- financing valuations is discussed below in the section 'Using the Venture Capital Method'. (Note: the concept of pre- and post-financing valuations is one that is also used in pricing flotations or initial public offerings. In these instances investment bankers will refer to the post- IPO market capitalisation and the implicit pre-IPO valuation.)

The Venture Capital 'Feel' For Valuation

One might immediately ask a key question: how do investors decide what a company is worth before they put in their money? This is a very difficult issue, and experienced investors will tell you that they sometimes have difficulty with this issue as well, especially with start-ups and early- stage companies in emerging industries.

Over time, however, regular investors see lots of deals and learn that there are acceptable ranges of values that work for them in certain , instances and/or industries. Rules of thumb emerge to guide an investor through the maze of valuation issues for such companies.

Yet these rules of thumb are also constantly changing, as they are influenced by valuations in other deals that the investor is seeing - even deals that are in dissimilar industries. (An American venture capitalist was quoted in 1994 as saying that he 'would never back a start- up valued above $1.5-2 million on a pre- money basis.' Two years later his firm was breaking that rule of thumb by an order of magnitude, investing in lnternet- related start-ups.)

In addition, the venture capitalist is always comparing deal valuations with values being achieved in the public markets and the mergers and acquisitions market. The investor's view on how the company might eventually look as an IPO candidate or in a trade sale, or how well the entrepreneur might perform on an IPO road show or in a trade sale process, will also come into play.

Determining the valuation for a transaction is neither straightforward nor easy, but eventually investors develop a 'feel' for what an early-stage business is worth at a specific stage. From the venture capitalist's point of view, the pre-financing valuation is 'set.' From that point, the final investment deal (usually centred on the amount to be raised) becomes a . negotiation with the party seeking funding, and the ownership percentages for the investor 'fall out' of that negotiation. If the entrepreneur finds the resulting percentage for the investor to be unacceptably high and pushes for a higher percentage for himself, the venture capitalist may ultimately conclude that the deal is 'priced too high' and decline to invest.

This process is neither totally subjective nor so arbitrary as it may sound. The experience of the venture capitalist has a strong bearing on valuations. When dealing with experienced early-stage venture capitalists, entrepreneurs are often surprised to find how close different

Valuation Issues in Start-Ups and Early- Stage Companies: The Venture Capital Method

venture capitalists' pre-financing valuations are for their company. (€5m / .40) + €40m = E52.5m

Subtleties in Venture Capital Valuations [post-financing equity value + debt = and Investments company valuation]

A. The Role of Debt Instruments

In valuing public (quoted) companies or mature private companies, the value of debt is added to the value of the equity to calculate the total value of the company. With start-ups and early-stage companies, debt often plays a slightly different role.

Consider the following example. An early- stage company needs to raise €45m from outside investors to begin the marketing and sales of the new product it has just developed. A venture capitalist initially determines that the company should be valued prior to the financing at E30m. Thus the venture capitalist would require E45m I (E30m + €45m) = 60 percent of the equity of the company.

However, the entrepreneur is reluctant to do a deal for 60 percent of the equity and tries to show the venture capitalist that the company is about to turn the corner, which should justify a higher valuation (and thus lower dilution for the entrepreneur). During further due diligence, the venture capitalist decides he still wants to back the company and sets out to find a structure that will be more acceptable to the entrepreneur. He proposes the following financing structure: putting E40m into debt or a debt-like instrument, such as redeemable preference shares, and E5m into ordinary shares for 40 percent of the equity, thus making the deal more acceptable to the entrepreneur (while also putting most of his investment (E40m) in a senior position).

Under this structure the valuation at which the investor would break even would be calculated as follows:

In other words, if the company were sold for E52.5m, then the investor would get all of his money back. This is the traditional way to calculate the value of a company.

In this example the investor may have convinced himself that the company is about to take off and that E52.5m should indeed be considered the post-financing valuation for the company, making the pre- financing valuation E52.5m - E45m = E7.5m. If the company does turn the corner, then the investor has made a shrewd deal and got his ordinary shares at a pre-financing valuation well below the E30m he originally determined.

But what if the company does not take off? What if it struggles and then needs even more capital, perhaps several rounds more? If this happens, then the investor might have judged the valuation incorrectly. Consider the following.

At the time of the E45m financing, the company was still at a very risky stage, and all of the money invested at that stage . was completely at risk, irrespective of how the investment was structured. The fact that €40m was invested in debt or preference shares did not make that part of the investment more secure or 'safer' than the €5m invested in ordinary shares. True, the debt held a senior position in the event of a sale or liquidation; but at that point in time it was unlikely that anyone would pay that amount (or perhaps any amount) for the company. (Otherwise. venture capital funding would not have been required!)

All of the money carried the same level of risk at that point and for valuation purposes should be considered, in effect, all equity - despite the financing structure. Indeed, the reason the venture capitalist

Valuation Issues in Start-ups and Early- 5 Stage Companies: The Venture Capital Method

invested the entire €45m was to get the equity stake in the company. Thus the debt or preference shares were really 'ordinary equity in disguise. (A venture capitalist is certainly not in the business of making straight loans to early-stage companies!) Hence, a more appropriate valuation calculation would treat the entire investment as equity:

Post-financing valuation = €45171 /.40 = €1 12.5111

Pre-financing valuation = €1 12.5m - €45m = €67.5m

At this point in time the investor should have considered that, despite using a debt instrument in the financing structure, his investment was effectively all equity, thus valuing the business at €67.5m prior to the financing (not the considerably lower E7.5m calculated earlier, nor even the E30m that the venture capitalist originally determined) because all of his investment was totally at risk.

It is important to understand the implications of making such a judgment about value. Assume that the company subsequently goes out to raise another E25m without being able to demonstrate any real improvement in its market or financial position. A new investor (or indeed the existing venture capital shareholder) might conclude that the value of the company at the time it is raising this new money is still E30m -or even lower.

That valuation is well below the E67.5m post-financing valuation that ended up being the effective pre-financing valuation in the previous round. This is unfortunate for the existing investor, because it means that: (i) he overpaid in that round and (ii) any new money raised at the lower valuation will dilute the existing investment. Indeed it is not uncommon in struggling early-stage companies for subsequent rounds of financing to dilute earlier rounds of capital down to insignificant levels of ownership.

At some later date, after the company has turned the corner, such that one can be reasonably secure about debt or preference shares being redeemed or paid out in the event of a sale or liquidation, then one can safely say that funds invested in a debt instrument or preference shares are no longer 'ordinary equity in disguise.'

Understanding this issue is especially important, as debt or preference shares are regularly used in early-stage financings for a number of reasons - to enable sufficient share ownership for the entrepreneur, to maintain a lower ordinary share price for use in subsequent stock option awards for management, to provide a preferential return for investors through accrued interest or dividends, and to boost investors' returns at exit through their senior ranking.

At earlier stages of a company's development such instruments may not reduce the risk of the venture capitalist's investment, as discussed above, but it serves to force management to build real value in the business. The result is a more equitable sharing of proceeds upon exit. If the company does well, then having part of his investment in a debt-like instrument will marginally improve the venture capitalist's return, because in an exit that part is repaid first - before management gets its share of the remaining funds. Similarly, if the company does not perform well but does eventually sell for the break-even amount (E52.5m in the example above), then the investor will get his money back with no return, but no one else will get a return either.

This is one of the main reasons such debt or preference instruments are used. If the financing were structured with all equity, the company above could be sold for less than €52.5111, and the entrepreneur would get a portion of those proceeds - even though the investors would not even get their full investment back. However, it is

Valuation Issues in Start-ups and Early- 6 Stage Companies: The Venture C3i)ital Method

inherently unfair for management to do well financially if the investors don't also do well. Using debt or preference instruments in this way precludes this situation.

The tricky part for investors is to discern when the company has crossed that line when investments in debt instruments or preference shares can truly be viewed differently from ordinary equity - for valuation purposes. This very important issue is discussed further in the section below entitled 'Using the Venture Capital Method.'

B. Convertible Instruments

Venture capitalists sometimes structure their investments using convertible debt. In these instances one should recognise that the reason for having the conversion provision is often so that the venture capitalist can get ordinary equity if the company becomes a success. The investment is being made on the assumption that the conversion will eventually be made.

In such cases, again one must determine whether the money invested in convertible debt is 'equity in disguise' and thus whether to include it in the valuation calculation, just as in the example in section A above. The conversion shares should also be counted, if they are expected to be issued, as it is the final equity position that ultimately matters to all parties.

(It is also important to recognise how the venture capitalist will act when the business does not do well. Eventually. instead of converting his shares into ordinary equity and focusing on building the business, the investor may change his view and begin to act like a real debt holder. Then his focus will shift from how to build the business to how to get his money back.)

C. Warrants, Options, and Ratchets

Warrants are 'options' attached to a debt instrument that give the investor the right to purchase ordinary shares at a set price at some later date. Warrants are sometimes used to enable the entrepreneur to achieve what appears to be a higher pre-financing valuation now in return for allowing the investor to increase his ownership later.

In the example in section A, the investor might have used a similar structure but put €40m into a debt instrument with warrants for more ordinary shares, exercisable after some later date. While the valuation will be higher when the warrants are not included, one must assume that the warrants will eventually be exercised, and thus those shares should also be included in the valuation calculation.

Another frequently used tool is share options for management andlor a ratchet that enables management to earn more ordinary shares depending on the performance of the company. In such cases one must understand the terms of the options or ratchet before deciding how to deal with them in the valuation calculation.

For example, if share options vest over time without any performance requirement, it is safe to assume that those options will eventually be exercised, so it is important to include them in the calculation. In the case of a ratchet where the outcome is uncertain, it may be prudent to do two valuation calculations, one assuming the full ratchet and one assuming no effect from the ratchet, to get a ;ange of valuations.

Consider a company in which a venture capitalist invests €7.5171 for 65 percent (130,000 ordinary shares) of the equity (200,000 total shares outstanding).. Assume that, at that time, in addition to shares they already own, management also hold options for an additional 20.000

Valuation Issues in Start-ups and Early- 7 Stage Companies: The Venture Capital Method

shares. The valuation calculation must include these option shares, since they will affect the ultimate ownership percentages of all shareholders. If the options are exercised, the venture capitalist will end up not with 65 percent of the ordinary shares, but with 65 percent diluted by the additional shares. First, one has to determine what the ultimate ownership will be if the options are exercised:

Investor's original position (130,000 / 200,000 = 65%)

becomes:

Then the valuations from the venture capitalist's point of view would be:

A quick calculation will show that each of the three parties paid a different price for their interest. It is not uncommon for the entrepreneur to get equity at a lower price than a venture capital investor, so a valuation based on the entrepreneur's investment is not necessarily relevant for assessing investors' views of the value of a company. However, one can determine the implied ' valuations for the other investors as follows:

Venture capitalist:

Post-Financing Pre-Financing €2.7m/.55 = €4.9117 - €3. Im =

€/4.9m €1.8m

lndividual investor: Post-financing valuation =

€i'.5m/.59 = C12.7rn Post-Financing Pre-Financing €300,000/.05 = E6.0rn -€3.Im =

Pre-financing valuation = €6. Om €2.9171

E12.7m - U.5m = €5.2m So, then, what was the value of the

D. Differential Pricing companybefore the financing (assuming no debt)? One might argue that it is the

In the examples above all of the equity in average of the two pre-financing

the company has the same value for a valuations, but that is not the case.

specific round of financing. Yet there are Remember that a valuation is dependent

instances where this is not the case. This on the party(ies) to whom the value

is most likely to occur when a company is accrues. Thus the venture capitalist

raising money on a 'piece-meal' basis, valued the company at €1.8m, while the

selling shares whenever it can and often to individual investors valued it at E2.9m prior

unsophisticated investors. In such to making their investments.

instances it is not unusual to see individuals buying shares at one valuation, Using the Venture Capital Method

followed (or preceded) immediately by an investment by a professional venture Often investors need to look at multiple

capitalist at another valuation. The result rounds of financing and understand the

can be a 'round' of financing as illustrated valuations at each round. Exhibit 1 shows

below: a format for constructing such an analysis.

Amount % of A. The Valuation Trend Trap invested ordinary

equity Once the calculations have been made purchased and the table created (as in the example

Entrepreneur €1 50,000 40% below), the key elemeni to focus on is the Venture capitalist €2,7W.000 55% Individual investors €300,000 5% pattern of valuations in ensuing financing

~3.15o.000 rounds. Many people make the mistake of

Valuation issues in Start-ups and Early- 8 Stage Companies: The Venture Capital Method

looking only at the pattern of post- financing valuations; however, this is actually misleading.

Exhibit 2 illustrates this point. Exito S.A. has raised four rounds of capital to fund the development and market introduction of its revolutionary new product. Looking at the trend of the post-financing valuation could lead one to conclude that the value of the company has been increasing steadily; however, this trend is actually misleading. The key to understanding the valuation is to compare the pre-financing valuation for a given round with the post- financing valuation of the prior round. Remember that the post-financing valuation for the prior round includes the cash that was just invested in that round, so part (and sometimes all) of any increase in post-financing valuations is simply the new cash sitting in the bank.

This is shown when comparing rounds 3 and 4 for Exito. After the money invested in round 3 had been used by the company, investors in round 4 concluded that the value of the company had actually declined, from €1.351 m immediately following the round 3 financing to E1,165m immediately prior to the round 4 financing. It was on this lower valuation that the round 4 financing was based. (Similarly. there was actually no increase in value from round 1 to round 2, nor from round 2 to round 3.) Thus comparing only the changes in post-financing valuations is meaningless.

What management and investors alike hope is that management will use any new capital to build the value of the company. It is the pre-financing value of the next round that indicates whether the investors believe additional value had been created. If indeed additional value had been created in Exito, then the pre-financing valuation of round 4 would have been higher than the post-financing valuation of round 3.

6. The Share Price Trap

Often people get confused with financing structures and resort to what seems to be the simplest way to measure value creation - tracking the ordinary share price. However, in the financing of early- stage companies the price per ordinary share is often an arbitrary figure that bears no relation to the actual value of the company. This fact is often the result of using a variety of instruments to achieve multiple investor and management objectives, including enabling management to hold a substantial equity position without comparable investment on their part, enabling share option awards to key employees at advantageous prices, and maintaining a senior financial position for the outside investors.

The actual amount of money invested in ordinary shares is often 'backed into' in order to achieve some of these other objectives. The price per ordinary share is initially established arbitrarily, and can be subsequently adjusted arbitrarily, for such reasons. Thus one might observe a steady increase in the share price of ordinary shares, while indeed the valuation placed on the company by investors may be erratic or even declining. The strength of the venture capital method is that it cuts. - through the confusion and puts all the data on relatively equal footing.

Consider the example in Exhibit 3. The ordinary share price for Lundgren AB has clearly been climbing, even though the company is not yet 'over the hurdle' in proving the sales story for its new service. However, let's look behind the ordinary sh-are price. There, lurking in the background, are 4,220 preference shares from the three rounds of financing. Exhibit 4 shows what the venture capital method reveals about the valuations of the company. In fact - despite the rising share price - there was no increase in value from round 1 to round 2, and the value actually fell from round 2 to round 3.

Valuation Issues in Start-ups and Early- 9 Stage Companies: The Venture Capital Methoci

C. The 'Count My Money' Illusion

While the venture capital method provides a useful way for entrepreneurs, as well as investors, to understand the implications of a financing, the entrepreneur cannot fall into the trap of believing that the value of his or her own shares can be deduced from these valuations. First, in such deals rarely can anyone sell out early, least of all the entrepreneur, whose ability to sell at any time will be restricted in the legal documentation (in a shareholders agreement or the articles of association).

A financing valuation relates only to a moment in time, but the truth is that it is not so relevant to a 'realisable value' at that moment in time. Rather, the relevance is to future value - the investor is valuing the company at a certain level now in the belief that the company will be able to realise a much higher value in the future (and not because he believes he can sell his investment now at the financing valuation).

Valuations and Financing Strategies

In start-ups and early-stage companies it is common that multiple rounds of financing will be required before a company can self-finance its growth. One of the big questions entrepreneurs face is how much to raise in the early rounds.

There is often a temptation to try to do the complete financing in one or two rounds only, raising as much money as one can in order to avoid having to raise subsequent rounds and suffer further ownership dilution; however, an alternative financing strategy should also be considered. In such instances it is useful to evaluate different scenarios.

In scenario one, try to determine what the company is likely to be worth after using the larger amount of capital being considered. In scenario two, determine the minimum amount of money needed to reach positive cash flow, on the

Valuation Issues in Start-Ups and Early- Stage Companies: The Venture Capital Method

assumption that additional capital can then be raised to fund further growth. In this second scenario, determine what the value of the company is likely to be once positive cash flow has been reached. Then factor in a further round of financing based on that valuation to fund the growth. Finally, look at the end value of the company and the resulting ownership percentages.

In scenario two the company should be able to raise the subsequent round(s) of capital at a higher valuation, leaving the entrepreneur with a larger final ownership position.

(A third scenario would consider whether the company can reach positive cash flow, or reach some other significant milestone that would result in a higher valuation for the next round of funding, without raising any new capital at the present time.)

One caveat: judging how much money is needed for start-ups and companies in their early stages of development is never easy, and missing a milestone can result in severe penalties. As we saw earlier, valuations for later rounds can go down if the company is not performing as expected; so it is a good idea not to cut it too tight and end up needing additional capital too early.

A Final Observation

As useful as it is, the venture capital method of valuing unquoted companies does have its limitations. First, the venture capital method is not a way of calculating what a company should be worth; rather, it establishes the valuation placed on a cohpany at a particular moment in time as the result of a specific (or expected) transaction, enabling one to compare different rounds of financing involving different financing structures or instruments.

Second, when certain instruments, such as preference shares, provide for

dividends or interest (whether accrued or paid out), such factors cannot be readily incorporated into the venture capital method calculations. Thus one has to use a certain amount of judgment when using such valuations.

Finally, remember that this method is most useful when a company is in the early stages of its development. At some point, and certainly once a company reaches profitability, the financing history of the company becomes irrelevant to its current value, as the more traditional valuation techniques can then be used.

The venture capital method does not offer the precision that a stock market analyst might require, and some may consider it little more than a back-of-the-envelope calculation. Yet the venture capital method remains a sound way of calculating valuations, and comparing them over multiple rounds of financing, in instances where more traditional valuation methods often fall short. It is for this reason that one often hears venture capitalists speaking of 'pre-money valuations' in a specific industry or describing their latest deal in terms of the 'pre-financing value.'

Valuation Issues in Start-ups and Early- 11 Stage Companies: The Venture Capital Method

k!!!!!!!..&!@?!@h~!!

Exhibit 1: The Venture Capital Method Valuation Calculations

Amount invested in this round A

No. of ordinary shares purchased B

No. of warrants, options, etc., outstanding C

Total ordinary shares D = I ( B + C)

% of total ordinary shares purchased E = B / D

Post-financing valuation F =A/ E

Pre-financing valuation

1 = summation

Valuation Issues in Start-ups and Early- 12 Stage Companies: The Venture Capital Method

Exhibit 2: Financing History of Exito S.A.

Founders started with 450,000 ordinary shares

Round 1: Raised €250,000 comprised of €12,500,000 for 150,000 ordinary shares and €237,500,000 in redeemable preference shares.

Round 2: Raised €250,000 comprised of €12,500,000 for 150,000 ordinary shares and €237,500,000 in redeemable preference shares.

Round 3: Raised ~100,000 comprised of €5,000,000 for'60,OOO ordinary shares and €95,000,000 in redeemable preference shares.

Round 4: Raised €360,000 comprised of €20,800,000 for 250,000 ordinary shares and €339,200,000 in redeemable preference shares.

Round 1 Round 2 Round 3 Round 4 Total raised in this round (€) 250m 250m 100m 360m

No. of ordinary shares sold 150,000 150,000 60,000 250,000

Cum. total ord. shares outstanding 600,000 750.000 810,000 1,060,000

% of total ord. shares in this round 25.0% 20.0% 7.4% 23.6%

Post-financing valuation (€) 1.000m 1,250m 1,351 m 1,525m

Pre-financing valuation (€) 750rn 1.000m 1.251rn 1,1651~1

Valuation Issues in Start-ups and Early- 13 Stage Companies: The Venture Capital Method

Exhibit 3: Financing History of Lundgren A6

Founders started with 68,000 ordinary shares priced at SKrO.10 per share.

Round 1: 50.000 ordinary shares at SKr1 .OO per share SKr50,OOO 1,450 redeemable preference shares 1,450,000

SKr1.500,000

Round 2: 20,000 ordinary shares at SKrl.50 per share SKr30,OOO 570 redeemable preference shares 570,000

SKr600,OOO

Round 3: 100.000 ordinary shares at SKr2.00 per share SKr200,OOO 2,200 redeemable preference shares

Valuation Issues in Start-ups and Early- 14 Stage Companies: The Ventul-e Capital Method

Exhibit 4: Financing History of Lundgren AB

Round 1

No. of ordinary shares sold 50,000

Cum. total ord. shares outstanding 1 18,000

% of total ord. shares in this round 42.4%

Amount raised this round (SKr) 1,500,000

Ordinary share price (SKr) 1 .OO

Post-financing valuation (SKr) 3,537,735

Pre-financing valuation (SKr) 2,037,735 \

Round 2 Round 3

20,000 100,000

138,000 238,000

14.5% 42.0%

600,000 2,400,000

1.50 2.00

4,137,931 5,714.285

3.537.931 \ 3.314.285

Valuation Issues in Start-ups and Early- 15 Stage Companies: The Ventul-e Capital Method