Enterprise Value and Market Value

Last week I mentioned that sometimes I am at a loss for something to post about on MBA Mondays. Andrew Parker, who got his MBA at Union Square Ventures (largely self taught) from 2006 to 2010, suggested in the comments that I post about the differences between Enterprise Value and Market Value. It was a good suggestion and so here goes.

The Equity Market Value (which I will refer to as Market Value for the rest of this post) is the total number of shares outstanding times the current market price for a share of stock. To make this post simple, we will focus only on public companies with one class of stock. The Market Value is the price you are paying for the entire company when you buy a stock.

Let's use Open Table, a recent public company as our real world example in this post. Open Table (ticker OPEN) closed on Friday at $48.19 and has a "market value" of $1.1bn according to this page on Tracked.com. According to Google Finance, Open Table has 22.77 million shares outstanding. So to check the market value calculation on Tracked.com, let's multiply the market price of $48.19 by the shares outstanding of 22.75 million. My desktop calculator tells me that is $1.096 billion.

So if you purchase Open Table stock today, you are effectively paying $1.1bn for the company. But Open Table has $70 million of cash and has $11.6 million of short term debt outstanding. So if you paid $1.1bn for the company (as would be the case if your company purchased Open Table), then you would be getting $70 million of cash and a debt obligation of $11.6 million.

So the Enterprise Value of Open Table, meaning the value of the business without any cash or debt, is a bit less than $1.1bn. To get the Enterprise Value, you calculate the Market Value and then subtract cash and add debt. When we do that, we find that Open Table currently has an Enterprise Value of $1.038bn. Not much difference in percentage, but almost $60mm in difference in dollars.

There are some companies that have a lot of cash or a lot of debt relative to their Market Values and in those cases it is really important to do this calculation to get to Enterprise Value.

We do a lot of valuation analysis on our portfolio companies, particularly the ones with a lot of revenues and profits. We do them mostly for our accountants as part of something called FAS 157 or "mark to market accounting". I am not a fan of FAS 157 and I've blogged about it here before. But regardless of whether or not I think "mark to market" is the right way to value a venture portfolio (I do not), it is the current practice and we need to do it.

When we do valuations, we often use public market comps to get "market revenue and profit multiples" and then we apply them to our portfolio companies. When you do this work, it is critical to use the Enterprise Values to get the multiples. Then when you apply the multiples to the target company, again you need to get an Enterprise Value and then work back to get Market Values.

If you use Market Values to calculate multiples, you may end up with some really screwy numbers for businesses with a lot of cash or a lot of debt. So use Enterprise Values when you are doing valuations and calculating multiples.

#MBA Mondays

Comments (Archived):

  1. disqus_ZVjJ1Ad4bh

    Very interesting, When you say cash you mean cash and other short term assets? (investment, share in acquired companies who in their turn have some cash and debt etc.)

    1. fredwilson

      i generally think of cash as highly liquid investments you could turn into cash within a day

  2. andrewparker

    Using enterprise value for FAS 157 purposes is yet another way in which FAS 157 is little more than false precision. But, yes, it’s certainly relevant to the propose application of using comps to value a company.During that MBA 2.0, I found using Enterprise Value (VS Market Cap) to make an interesting and meaningful difference when analyzing the value of a private company relative to itself. For example, take Company X and look at its financing history over time relative to a key metric in the business, like revenue. The ratio of enterprise value / revenue at different points in time will be pretty consistent if the company is being financed at a “fair” valuation along the way. If Company X is over-valued or under-valued in a financing you can see it in the ratio over time. And, if you use Market Cap instead of Enterprise Value, then the size of a financing (or any cash/debt in the company prior to fiancing) will add needless noise to this ratio and confuse you.

    1. kagilandam

      That is a great lesson. Especially Enterprise Value /Revenue over period of time. But how do you get the Enterprise Value when the company is private and not public. Is it purely based on profit Vs time graph? and then project it over few years? (hope it is a Economy101 question).One more doubt….it sounds little straight forward to get Enterprise Value from Market Value. But how do you get MV from revenues/profit and see whether the market value is right or over-rated?.

      1. andrewparker

        Whether the company is public or private, it’s still just the total marketcap (all shares X most recent share price) minus cash plus debt. So, if acompany raised $5M on $45M Pre, and had $1M cash in the bank and $2M inoutstanding debt, the the Enterprise Value is $50M – $6M + $2M = $46MEnterprise Value both before and after the financing.

        1. fredwilson

          nicely donei probably should have had you guest blog this one andrew

        2. Dan Sweet

          This is where those off balance sheet liabilities from a couple posts back come into play in a serious way. The example of Best Buy (BBY) that I brought up in a prior comment illustrates this perfectly. BBY has basically 10B+ in “additional” debt in the form of the bulk of their store leases that you don’t see as debt looking at their financial statements. When their entire market cap is 14B this stuff starts to really matter.

          1. JLM

            Technically, they have the difference between the NPV of their required lease payments MINUS the NPV of a replacement tenant PLUS the general cost to relet including leasing commissions and any tenant improvements. The discount rate employed by both calculations should be identical.This is why the negotiation of a liquidated damages monetary default remedy provision in a real estate lease is such a critical element for any corporate real estate user. It dramatically limits the amount of the downside risk in real estate.In addition, a large user like Best Buy is often able to command such a lead tenant or credit worthy tenant discount that the NPV of a replacement tenant may be GREATER than the NPV of BB’s lease liability.

          2. joeagliozzo

            And tacking on to JLM’s comment – if the leases are assignable (and even if they are not, a bankruptcy judge can in essence make them assignable if they are an asset of the estate) the lease can even be worth more than the liability carried on the books for future lease payment obligations or LD’s.So having an LD is great because the company has limited downside risk to an amount certain, but has upside based on “lead tenant discounts” from the original lease in the event they sublet or assign in future.I think this was the bases of some very profitable transactions for a creditor of Kmart or other big retail chain a few years ago.

          3. andrewparker

            Scary. Are off balance sheet liabilities available on any consumer finance portal, or does everyone really need to go read the 10k and 10q docs?

          4. Dan Sweet

            not readily available that i know of. anyone else seen a site that attempts to highlight this?here is the BBY example buried in the full 10khttp://yahoo.brand.edgar-on…search “note 9” and jump to the second result.They start with this: “Other than operating leases, we do not have any off-balance-sheet financing.” Then say that the current year lease-related obligations are 1.16B and the total obligation is 8.48B. Then they add a footnote to that number where they say: “Operating lease obligations do not include payments to landlords covering real estate taxes and common area maintenance.” Cause when making a footnote to disclose numbers why disclose the actual numbers right? They then go on to admit that the 8.48 is actually 10.68B if you want to actually count their obligations as obligations.

          5. andrewparker

            Wow, crazy.This is ripe for a crowdsourced interpretation model. Not everyone shouldhave to do this work.Andrew

    2. JLM

      The valuation of private companies is very much art as it does not really have an objective and sound starting point.While it is always possible to compare a private company to a public comp or use a consistent comp (multiples of whatever), the real question may be —what is the company worth if sold or dismembered.The dismemberment issue is very applicable to multi-unit operating businesses in which the aggregate value of the units is more than the enterprise because you are able to evaporate the corporate overhead of the selling enterprise.Your approach is perfectly sound and wise though it does overlook a couple of delicate but important considerations — what is the nature of the debt taken on and what is the embedded ROI on the incremental funding? This may not show up for several quarters as additional operating units or expansion may not be immediately accretive.The second consideration is how the company handles the repayment of its debt over time.I have seen many a company which takes on meaningful amounts of debt, has its returns lag by several quarters or even years and then smoothly repays its debt. There is almost a sine curve nature to its financial performance.As you have indicated, looking at it over time is the cure for identifying and understanding the seasonality or cyclicality of this performance.This is one of the reasons I am so keen on looking at ratios over time.

  3. kidmercury

    market value is a joke because the public markets have been turned into a casino. the practice of quote stuffing moves prices to levels where there is no intent to buy or sell.http://www.zerohedge.com/ar…the public markets have also been turned more so into vehicles for speculation rather than true price discovery because of de-regulation (which was supported by your boy schumer….even though in 1987 he wrote an op-ed for the nytimes entitled “dont let banks become casinos” in which he urged against de-regulation…..then when he got to the senate in 1999 he voted for de-regulation……hahahahhaha)

  4. David Semeria

    Fred, I think it’s essential to point out to your readers when to use market value and when to use enterprise value in calculations, hence avoiding the “screwy numbers”.The knack is to figure out which capital base contributed (or has a claim) on the value.For example, EBIT, EBITDA and Free Cash Flow are all ‘enterprise value’ figures. All of the capital base (ie debt + equity) contributed to them and therefore have a claim.Hence you would calculate EBITDA / EV, FCF / EV etcNumbers which come after the interest charge mean that debt has already taken its share.So you use market value for earnings and dividends. eg Net Profit / MV (the inverse of the PE ratio) or Total Dividends / MV (the yield).Hope this helps.

    1. awaldstein

      Clarifying David, thanks!

    2. fredwilson

      that’s a good point davidthanks for raising it

    3. JLM

      You obviously have a well organized mind and a great command of all things financial. I am always aghast to see how poorly people understand the derivation of such things as EBITDA starting from a GAAP defined term. EBITDA is, or course, not a GAAP defined term.I love to see the almost “buckministerfullerene” nature of how all things financial relate to each other. That is the engineer in me melding with the financier. It is really financial engineering.When delved into, the structure is as complete and interconnected as literally a buckyball.The interesting thing is that undoubtedly ONE or TWO of those 25 different views of the numbers will contain a signal that when compared to one’s experience, comparables or accepted levels of performance will provide a caution light or at least identify some inherent weakness. Not a fatal issue but one demanding a bit of light to be thrown on it.I tend to focus most directly on those things related to “cash” and how that cash relates to the capital invested. If the FCF is good and trending upward, then this augurs for the investment of more cash.My other key indicator is plain old fashion gross margin. Give me a business in which the financial engine is providing a good gross margin, and I can fix the rest of the packaging.There is no substitute for cash and gross margin whether it is there just now or attainable just around the corner.At the end of the day, knowing the numbers is the first step of making order from chaos and when you make order from chaos, you always make money.

      1. David Semeria

        Thanks JLM.I had to look up ‘buckyball’ – but I can now see what you mean.I think there are two very different types of financial concepts. The first (and for me, with an engineering background, the easiest to comprehend) are those that share the same fundamental simplicity and symmetry with the laws of physics. Once you get your head around these few basic principles, you can derive many other financial concepts with ease.A good example of a basic principle of finance is that return is directly correlated to risk. I always spend much time trying to explain this to friends during a bull market. They get envious seeing other people making ‘easy’ gains and want to jump in. But what goes up can also go down. My friends want their upside without any downside risk. But that’s not how it works. Risk is symmetric.Another good example of symmetry is leverage. A bit of debt can work wonders on the way up, but has an equal and opposite effect on the way down. And because the laws are universal, the context is irrelevant. Whether you’re thinking of gearing-up an operating business, or whether to buy a future, or (rather appropriately) whether to take some equity out of your real estate – the same principle will always hold.These types of financial concepts are like mathematics: you can rely on them.The other type of financial concepts are the man-made ones. They share none of the simplicity or symmetry of the other kind. They can be found in accounting and tax documents.I cannot get my head round them. There is no pattern, no logic and no elegance to them. Mastering them is just a question of reserving a lot of space in a rather dull mind.

        1. Mark Essel

          Mech physics background helped with JLMs analogy. Still, without living breathing examples much of the terminology you guys use to describe financial tracking sounds like a Charlie Brown school teacher. I’ll have to survive my own financial incompetence enough to get a solid handle of cash flow. It doesn’t matter without paying customers, the most important (Only) problem to address!

        2. Carl Rahn Griffith

          Beautifully described, David.And isn’t it many of the metaphysical man-made (construed, not constructed) financial ‘products’ that got us into the recent mess? Again.The way so many of the investment banks have so quickly bounced back from billions of debt to billions of profit gives me a headache. To me, and my simple fiscal mind/values, it makes a mockery of wealth creation, frankly.

          1. David Semeria

            The banks are merely pipes which allow irresponsible behaviour to flow through the system.The current crisis has stunning similarities with the Great Depression, which was provoked by individuals taking on too much debt in order to buy things they would otherwise have saved-up for.Some argue the banks were culpable for making these dumb loans. I don’t disagree.But the ultimate blame lies with the millions of ordinary people who tried to live way beyond their means indefinitely.

        3. Donna Brewington White

          These are enlightening “ponderable” thoughts, David. Thanks.

          1. David Semeria

            No need to say thanks!I spent some time thinking of an answer to Shana’s question, and her reply seemed a bit sharp.

      2. Evan

        as a Rice grad, I love to see buckyball references.

        1. JLM

          I have never met a Rice grad with whom I was not hugely impressed. Rice is one of the best schools in America and one of the best kept secrets.

          1. Evan

            I wish there were more people like you. Even in Texas, the name has less pull than I expected before I graduated. While I was there, Rice had the highest percentage of national merit scholars in the nation, but no one would ever guess that. Still, while it lacks UT’s connections even within Texas, I loved my time there.

      3. Carl Rahn Griffith

        Love it:”My other key indicator is plain old fashion gross margin. Give me a business in which the financial engine is providing a good gross margin, and I can fix the rest of the packaging.There is no substitute for cash and gross margin whether it is there just now or attainable just around the corner.”

    4. ShanaC

      The question of the day- why are these numbers correlated the way they are. Almost on the deep math way…

      1. David Semeria

        It’s not really a correlation, Shana.It all boils down to the difference between debt and equity. Debt has first claim on assets and operating profits, but only up to the value of the principal and interest owed. Everything that’s left over is for equity.Enterprise value measures the total capital employed (debt + equity) in a business*. Whereas market value only measures the equity.So, in simple terms, the EV of your house is the price you would sell it for. And both sources of funding have a claim on the proceeds. The debt (mortgage) first, and then whatever’s left – your equity.Similarly, the (equity) market value of your house would be the EV minus the debt. In other words, the sale price minus the outstanding mortgage.I hope that makes it clearer.*Strictly speaking EV is the market value of the capital employed. Generally when financial analysts talk about ‘capital employed’ they are referring the nominal value (ie what actually went in, not what the market values what went in).

        1. ShanaC


          1. David Semeria

            You’re welcome.

          2. ShanaC

            Well, if I don’t ask, no one will. Better info explicitly out there than not.

          3. David Semeria

            There’s absolutely nothing wrong with asking questions (I do it all the time – that’s how I learn).But I’m always careful to say thanks to whoever took the trouble to provide an answer.

          4. ShanaC

            Thank you as well

          5. JLM

            I have a picture of Tom Cruise in A Few Good Men — LOL!

          6. ShanaC

            I’m slightly too Scarlett O’hara to be Tom Cruise…. 😉

  5. maverickny

    Nice post, Fred, that really helps explain the two terms more clearly.With regards to MBA Mondays, have you posted about business plans yet? I have to write one soon and was wondering how to structure it.

  6. kagilandam

    Liked and thanx.

  7. LIAD

    Learnt a lot from MBA Mondays.Perhaps ‘next term’ could be focused on topics more acutely targeted to entrepreneurs and startups in the early years of their journeys and away from more generic financial matters and concepts – which whilst highly informative – kind of feel that we’re not making the most of your expert knowledge.You have such a wealth of experience in matters startup, company building and the inevitable challenges and successes along the way and have been involved with so many companies which have gone from initial idea to roaring success – seems a shame not to ask you to educate us on some of the recurring patterns you’ve noticed over the years.I was thinking about subjects such as:Best practices for creating an option poolDealing with M&A interestManaging shareholder expectationsGrowing a teamMost effective management stylesWork/Life balanceReacting to changing competitive landscapesPerhaps, if you were willing, we as a community could crowd-source and then vote on a list of topics we would collectively find most exciting.Just a thought…

    1. kagilandam

      Nice thought LAID and you are driving MBA Mondays to MBA-M-2.0.I really wish to know the key things as entrepreneur to look at where the VCs can make me a jackass ( i may be one but i don’t want some-else to call me that 🙂 ). while signing the investment document.

    2. awaldstein

      Option pool discussion is critical and something that generally, most folks know little about.My vote goes to this one!

    3. fredwilson

      those are some great topics LIADi will make sure to get to them all

      1. JLM

        There is a damn good business primer and a website driven by the compilation and editing of the MBA Mondays and other selected blog posts with attendant comments.You are to the point where folks are calling for subjects you have already covered.You have created a monster! And a very thoughtful, smart and curious salon with quite courtly manners and courtesy.The most important thing you have accomplished is proving that education, transparency, engagement and kindness is a good brand building strategy.Well done!

        1. fredwilson

          thanks JLMyou’ve built your brand nicely using similar techniquesmaybe you should branch out into angel investing 🙂

        2. Donna Brewington White

          As with so many academic degrees, much of the practical application is missed — even in MBA programs from what I’ve heard (and observed in the finished product). I’d imagine that this is multiplied when this is being applied to an entrepreneurial venture. What I love about what Fred is doing here is that he’s making it real. Even someone like me with a biz undergrad but who went the opposite direction at the graduate level can track along. You certainly add much to the learning and discussion. You and Fred make a great tag team. Love your description of “the salon.”A European professor once shared how his graduate students would often meet at a pub after class to continue the discussion. That’s what I often think of here.

      2. David Semeria

        The subject of a great guest post from Andrew Parker would be a worked example of a DCF used by a VC (rather than an entrepreneur) to reach a valuation.There would be a whole host of nuggets to be revealed, including:1) what cost of capital do you use?2) does it stay constant or does (rightly in my view) decrease as the business becomes less risky.3) how many periods do you explicitly forecast4) what assumptions do you use for the terminal value.I know that VCs use more than one technique to value a company – but we all know that DCF is the daddy of them all.This would be a fascinating look behind the scenes, especially if accompanied by some real-life parameters.Too much kimono aperture? Surely not…

        1. giffc

          I was trained never to consider DCF to be a useful method for valuation unless a tech company is quite mature. There are far too many unknowns, the discount rate is too sketchy, and the terminal value usually ends up being too important. Public company and M&A comparables are what we always focused on.

          1. David Semeria

            I can see why you would hold that view.The problem is not so much with DCF methodology (which can be viewed to model any investment) rather with the assumptions and forecasts used.When dealing with high growth situations, instead of just typing a single set of assumptions and forecasts into a DCF spreadsheet, I create a model of the P&L and CF statements which I can then run with a range of different scenarios (from the most pessimistic to the most optimistic).The output of each model becomes the input to each DCF version. The next step is then to simply calculate the weighted average of all the DCF outputs (where the weight is given by a simple [normal] probability distribution). This is basically how Black and Scholes works for options.The good thing about this approach is that it really forces you to think about the mechanics of the underlying business. You start to see how the cost base, operating profits and cash generation behave at different scales, and this insight is often more more useful than the valuation itself.

          2. giffc

            Cool David, I see where you are coming from, and I can see how the exercise could be powerful albeit time consuming. Are you running this exercise to value options in private companies?Agree with you about assumptions. My only concern in general with this stuff — and I’m not alluding to you since I don’t know your context — is that one can take complexity and layers of assumptions too far in financial models. This gets dangerous because one creates a house of cards with a false sense of security and sophistication, not to mention a layer obfuscation that comes from the complexity itself. I just look at Long Term Capital or the recent Wall Street crisis.

          3. David Semeria

            I actually developed the technique about a decade ago when I used to value listed companies for a living. The method works best when the valuation depends on a small number of key variables. The perfect example would be oil stocks where there’s basically only one variable – the price of crude.The technique borrows from option theory, but the output is actually a range of company valuations. If you think of an n-dimensional cube (where n is the number of variables you want to map), you get a line inside the cube which represents the valuation at each specific combination of variable values.Alternatively, you can just take a slice from the cube and see how the valuation varies with just one isolated variable (the others remaining fixed at the given point in the slice).The technique was very useful for valuing asset managers, where there are only a few key variables (stock and bond performance, management fees, and increase / decrease in new money into the fund). It was particularly interesting to see how assets managers of different maturities (ie how many assets under management they already had) were more sensitive to different variables.It’s true the model takes time to set-up (but you only have to do it once for each industry). Thereafter, it’s actually a lot quicker than normal DCF analysis because you don’t have to spend time trying to forecast the key variables, you just let the model show you how the valuation changes as these variables change.I agree with your point about layers of abstraction in finance. They can be dangerous. But I don’t think it applies to the method I describe since no new abstractions are created. It’s just like when you ask someone “what’s the worst, medium and best case scenario”. That’s more information, not less.

    4. Aviah Laor

      Good list.Also Outsourcing/ in house trade offsThere is value, however, to get some hints about the dynamics of bigger companies, even for the tiny start-up. Not too much, but once a week perspective is important. Makes it a real target.

  8. JLM

    The issue in any valuation term or methodology is really — what is the intended purpose or application for valuing the enterprise? Why are you doing it?With public companies, it is almost purely just an “exercise” with no real world use. OK, so you know the “enterprise value” of the company — now what are you going to do? It is not “investment analysis” which might lead you to buy or sell a stock.I urge caution in using such simplistic — though perfectly legitimate and fairly reasoned and otherwise generally useful information — valuation techniques to make important decisions.One must look to the balance sheet of the company and carefully scrutinize the exact nature of the assets and liabilities of the enterprise.Two very obvious examples are the nature of the real estate which houses the company’s operations — do they own it or lease it? The second is the nature of their long term leases — real estate, operating and financing leases.Remember that real estate owned by the company is going to be valued at “depreciated book value” and therefore likely has a market value far in excess of its current book value. This could be a huge font of value and was one of the key drivers of the LBO business — the unlocking of the targeted company’s unrealized real estate value.As to leases, they are liabilities which are likely to be incurred far into the future, if not properly managed. As an example, I know a company which will not enter into a lease without a 6 months liquidated damages provision in the event of a default. Thereby the liability is limited to 6 mnths rent in the event of a monetary default. A damn good downside protection but a huge impact on the real value of the company if it has 100 operating units.

  9. Guest

    A little background before I start spouting off. I have been engaged in valuations for over 15 years, first as a CPA and then in various corporate roles. Looking at Enterprise Value is so important. Few comments to readers. Always, always, always do your best to consider the sometimes not so obvious, even peculiar items. For example, unfunded pension liabilities as a liability or stock options, minority interests, etc.

    1. Amrithk

      Are unfunded pension liabilities added to enterprise value?

  10. ShanaC

    Fred and Andrew, for a totally different post, you were doing a different form of accounting, but with second market, how do you think accounting should be done since technically you do have a slow moving asset? That post is over a year old, and mark to market we’ve seen already can cause some interesting shenagigans.If Andrew is correct about Noise Issues, aren’t we creating/dealing with a whole different kind of noise beast when it comes to your silver lining of your other post?

  11. scottmag

    Here’s something that still trips me up about the “total number of shares outstanding” part of the equation. Is it only that shares that are publicly traded, or is it all shares? For example, if I divide a hypothetical company into 100 shares and sell 50 at $1 each, while retaining the remaining 50 for myself, is my company worth $50 or $100?I saw this come up in the discussion about Apple passing Microsoft in market valuation – that Bill Gates’ shares didn’t count in Microsoft’s market cap total. It reminded me of the mock press release form 37 Signals highlighting the absurdity of market valuations: “37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.”

    1. Rocky Agrawal

      This reminds me of the million dollar home page gimmick from a while back where some guy sold a page for $1 a pixel. It was clever, but what buyers were buying weren’t really the pixel — they were buying the publicity that went along with participating. Golden Palace Casino was particularly good at buying publicity like this.http://www.milliondollarhom

  12. Senith MBA tutor

    Excellent post and discussions! I tutor MBA students and have seen a lot of prof’s over-complicate these concepts. Neat summary.

  13. Rocky Agrawal

    Off the general topic of EV vs. MV, but since we seem to have an army of accountants today…when a deal like the Slide acquisition happens, how are retention packages accounted for? Are they considered part of the deal or are they considered as ordinary salary/bonus expenses when paid out.

    1. JLM

      Expenses are accounted for on the books of the entity which actually pays the expense.Unless there is some unfathomable complication, they would be liabilities of and expenses to the acquiring entity and income to the individual recipient.The acquirer would account for them as expenses of the deal for financial/acquisition analysis purposes and as compensation expense for GAAP purposes.Another interesting question is whether the injection of a retention package changes the “at will” nature of the employment relationship or is there a vesting arrangement which is waived in the event of certain “not for cause” terminations or resignations?The entire issue is one step removed from slavery — the nicest form of commercial slavery, mind you but slavery nonetheless — as the acquirer is “buying” the people as surely as he is buying the company thereby making the talent just another conveyable asset.No problem with than, just a curious way of looking at things. Good for the talent.

      1. Rocky Agrawal

        I’ve seen such deals done such that as long as the employee didn’t resign/terminate for cause, they were eligible for full retention package, even if they were laid off before completing the term.It makes sense in that in theory the point of paying for retention is to offset the individual’s opportunity cost of doing something else.

        1. JLM

          Most retention deals are simply “golden handcuffs” and competitive restraints. The acquirer doesn’t want the guys who really did the work setting up shop down the street and mimicing their success for some else’s benefit.In addition to the golden rule — he who has the gold makes the rules — there is the corollary pertaining to the brains of the operation. Always make sure you buy or rent THE brains. Do not allow the brains to be wandering around looking for something to do especially when you just paid so much for the body.

  14. taylorwc

    Great post, Fred. In terms of future posts, it would be fascinating for you to write about term sheet negotiation, both from the perspective of the entrepreneur and the VC (if you feel you can do so without showing your hand too much).It seems like there is always a huge disconnect between what the entrepreneur sees as valuable/relevant in the negotiation vs. what the VC cares about in the negotiation.

  15. Pascal-Emmanuel Gobry

    Couple points:1- You do a great job of explaining the difference between Enterprise Value and Market Value and how you get to one from the other, but you never explain *why* you should use Enterprise Value for valuations. The reason is easily inferred just from the names: you need to compare the values of the “underlying businesses” and not the companies themselves, which is also why you use EBITDA multiples and not, say, net profits, but you never actually spell it out. For someone who doesn’t already understand valuation, I’m not sure if your post is 100% clear on this.2- I’d like to needle you a little bit on mark to market. ;)I was in business school around the time the financial system collapsed and so we had a lot of classroom debate about mark to market, which was in the frontpages around that time. I’ve always been a proponent of mark to market. Tellingly, my older, French accounting prof was strongly opposed to mark to market, while my younger finance prof who had taught in the US was strongly in favor of it.I’m in favor of mark to market because at the end of the day, what your assets are worth is what you can sell them for in the market, period. Markets get stuff wrong all the time, and an asset’s market value might be wildly different from its “true” value, but when you report to shareholders every quarter, whether they be LPs or public stockholders or what have you, what they want to know is what your assets are worth *in the real world*, *at the moment when you report them*. You have every liberty to say “we think these assets are going to be worth a lot more in the fullness of time” and it’s up to the shareholders to decide whether they agree or not, but that doesn’t absolve you of your responsibility to say what your assets are worth each quarter.As they say in first semester accounting, a balance sheet is a “snapshot” of your assets and liabilities. If at a given time that “snapshot” doesn’t look good, well — that’s life. And if you have the right shareholders they’ll support you until the picture gets better, but you still have to give the picture.As for venture firms, the two criticisms of mark to market I’m aware of are the following:1- It’s a heavy administrative burden that detracts from the venture firms’ actual work of investing in companies and supporting portfolio companies, and2- Classic valuation methodologies (DCF, comps) aren’t fit for early stage startups.None of these are convincing to me.1: Let’s assume it takes a half day on average for a VC analyst to do a valuation on a portfolio company. For a Zynga it would be more, for a Disqus it would be much less. For a portfolio of 20 companies that would mean 10 business days. If you have two analysts, the work is done in a week. One week every quarter to report to your shareholders doesn’t seem so extravagant to me. And for most companies the analyst will already have spreadsheet models for that company where you (mostly) just have to plug in the new numbers, so I suspect it might even take less, although I don’t know because I’ve never worked inside a venture firm.2: Yes, using comps to value, say, a Twitter, is kind of absurd. But what’s the alternative? At the end of the day, you do need to evaluate what your portfolio is worth, and you do need some sort of rigorous process to do that. Traditional valuation methods are always at best an educated guess, whether you’re valuing a $50bn public company or an early stage startup, but they’re the most educated guesses we know how to make. Unless I’m missing something, any alternative is going to be even less rigorous.Sorry for kind of hijacking your thread and I’m certainly not “attacking” you, but I’d very much like your take on these issues.

  16. scottsemple

    Isn’t enterprise value defined as equity plus debt? (Not market value plus debt?)OPEN’s 2009 report states shareholder equity at $73,405,000. Add the $11.6MM in debt to that and the total enterprise value is $85MM.Market value has very little to do with actual equity, no?

  17. giffc

    When I was at Broadview (now part of Jefferies), the best method I saw to teach this non-intuitive concept to new analysts was to use the analogy of a car you just bought for $10K, which had $1k of cash in the trunk, and a $2K loan (debt) still attached (which you assumed) … then we got the analysts to think through which they needed to add, and which to subtract, to figure out the value of the car itself.

    1. fredwilson

      nice way to think about it

  18. Vistor69

    I’m not familiar with US GAAP.Can someone clarify what is “debt”? – Does it include all debt (Long Term and Short Term)?- Does it include Accounts Payable?

  19. jer979

    As usual, loving the MBA Monday post. Also, just watched (finally) the Twilio presentation. That was classic.Got me thinking…would be great to have an in-person MBA Monday. We’ve done the AVC Meetups, etc., but a half-day of Fred Wilson download and some networking with the other fans of your blog. That’d be great. I’d certainly come up to NYC for it and, heck, I’d probably pay for it. Have a showcase of some of your portfolio companies as well so we can blog/tweet about them at the same time.</wishful>

    1. fredwilson

      you want to get me up on the stage talking MBA? hmm.

  20. Dorian Benkoil

    Hey, Fred, think you neglected to tag or categorize this one as MBA Mondays — not showing up on that aggregation page.

    1. fredwilson