There are four very important questions to answer in order for a start up Internet/e-commerce company to attract capital. These are: What is the company worth today? What could it be worth in the future? How long will it take to create that value? What is the likelihood (risk) of achieving success? The answers to these questions are critical in attracting outside capital. In this issue of Eye on Value we will focus on the first question relating to the current valuation.

When valuing any company, whether it is young or mature, there are many factors that are considered in determining its current value. This is especially true in young companies seeking to attract capital. Some of the more important factors are:

Based on the specific details surrounding these factors above, a young company can be generally categorized into one of four stages in its growth cycle.

STAGES OF GROWTH – New companies go through various stages of growth. These four stages are commonly referred to (from least mature to most mature) as the Initial/Seed stage, Early stage, Middle stage, and Late stage. The stage that a company has reached is often a strong indicator of value. A key in determining value is first determining the stage that the company most closely resembles. Generally, the more mature the stage, the greater value a company has.

Initial / Seed Stage - Companies in this stage are generally characterized by having an idea that is being explored, but has not been developed. The Web site is only a concept that may or may not be under design, and the company has neither clients nor revenue. Management is limited to the founders and there are very few, if any, other employees. Funding is typically provided by "friends and family."

Early Stage - Companies in this stage are beginning to develop and test their Web sites, have identified key management personnel, are hiring employees and developing some strategic relationships. Revenue generation still may not have started at this point. There may be some patents pending and a few pending partnerships. Beta testing has begun. Many Early stage companies typically get funded by "friends and families" and maybe some "angels" or early stage VC funds.

Middle Stage - These companies have developed and are beginning to implement their product or service; revenue is growing, although there may be losses; the management team and advisory boards are substantially in place; there are strategic partnerships in place; and there are more repeat customers. Funding is generally provided by strategic partners and VC funds.

Late Stage - Companies in this group have proven their business model; have depth of management; have attracted quality outside board members; are experiencing solid revenue growth; have developed critical long term strategic partnerships; and have an expanding client/customer base. This stage is usually funded by VC firms and investment banks.

VALUATION OF THE COMPANY – Based on the stage of the company, a range of values can be determined in order to compare similar stage companies. By putting same stage companies in a "basket" of ranges of value, a potential investor can compare similar opportunities in similar stage companies. Many investors have different values for different stages, but below is a table outlining some ranges of values of companies in the various stages:

Please note that these are theoretical ranges of values and based on many factors, including the potential upside or downside, competition, likelihood of success, etc. Each company is valued based on its specific facts and circumstances.

VALUATION OF COMMON STOCK INTERESTS - In the early stages, stock is usually common stock and is funded for "pennies a share" by the founders and maybe "friends and family." Once the valuation has been agreed upon, typically the form of additional capital is typically invested in convertible preferred stock. This preferred stock is usually issued at a per share price in excess of the common stock. Preferred stock generally has many advantages over common stock, the most significant of which is a preference on liquidation events. Generally, the holder of preferred stock will receive returns of its invested cash as a priority distribution before common stockholders.

As a result, common stock in startup companies generally has very little initial value. As soon as an investor commits to the company, normally receiving preferred stock in return, the common stock appreciates somewhat. As the company reaches certain milestones (technical, strategic, or financial), the common stock continues to increase in value, approaching the value of the preferred stock. Eventually, if a liquidation event becomes foreseeable, the common stock will increase in value relative to the preferred stock value. The relationship in value between common and preferred stock is an important component in the determination of the value of stock interests in start up companies. The unique and specific facts and circumstances surrounding the stock of a particular startup company can greatly affect this value relationship.

TAX PLANNING IDEAS FOR STARTUP COMPANY SHAREHOLDERS Significant tax planning opportunities exist for shareholders of startup companies. The underlying concept is to gift shares of startup companies while the value of the stock being gifted is relatively low. With proper planning, stock in startup companies can be transferred to family members or others without incurring significant gift or estate taxes. In this way, the potential appreciation can be enjoyed outside of the estate.

If you have any questions or are interested in our valuation services, contact Craig Stephanson at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call at 301-770-2077.

Featured Company

In the last issue of Eye on Value we featured bid4assets.com, www.bid4assets.com. This early/middle stage company continues to grow and expand. This issue of Eye on Value features another start up company, NETSCAN.

www.netscan.com is another website to keep your Eye on. NETSCAN is the premiere online, real-time legislative and regulatory information service on the web. This company captures, summarizes and redistributes proposed and implemented regulation and legislation from all 50 states. Clients, including Fortune 500 companies, are advised by email alerts, daily information updates and 24/7 unlimited access to Netscan’s databases. The company is rapidly growing and preparing to release new products this fall/winter. NETSCAN is one of the investment opportunities listed below. The Zitelman Group was a lead investor in the first and current second round of financing for NETSCAN.

INVESTMENT OPPORTUNITIES….

The Zitelman Group is continually evaluating investment opportunities in closely held entities. Currently, we are considering investment in 3 opportunities over the next couple of months, a real estate investment, a radio station, and NETSCAN. If you are interested in receiving more information about any of these investments, please contact Stuart Bassin at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 301 770-2077.