Posts from MBA Mondays

Last week I kicked off my MBA Mondays series on Employee Equity. Today I am going to talk about one of the most important things you need to understand about employee equity; it is likely to be diluted over time.

When you start a company, you and your founders own 100% of the company. That is usually in the form of founders stock. If you never raise any outside capital and you never give any stock away to employees or others, then you can keep all of that equity for yourself. It happens a lot in small businesses. But in high growth tech companies like the kind I work with, it is very rare to see the founders keep 100% of the business.

The typical dilution path for founders and other holders of employee equity goes like this:

1) Founders start company and own 100% of the business in founders stock

2) Founders issue 5-10% of the company to the early employees they hire. This can be done in options but is often done in the form of restricted stock. Sometimes they even use "founders stock" for these hires. Let's use 7.5% for our rolling dilution calculation. At this point the founders own 92.5% of the company and the employees own 7.5%.

3) A seed/angel round is done. These early investors acquire 5-20% of the business in return for supplying seed capital. Let' use 10% for our rolling dilution calcuation. Now the founders own 83.25% of the company (92.5% times 90%), the employees own 6.75% (7.5% times 90%), and the investors own 10%.

4) A venture round is done. The VCs negotiate for 20% of the company and require an option pool of 10% after the investment be established and put into the "pre money valuation". That means the dilution from the option pool is taken before the VC investment. There are two diluting events going on here. Let's walk through them both.

When the 10% option pool is set up, everyone is diluted 12.5% because the option pool has to be 10% after the investment so it is 12.5% before the investment. So the founders now own 72.8% (83.25% times 87.5%), the seed investors own 8.75% (10% times 87.5%), and the employees now own 18.4% (6.8% times 87.5% plus 12.5%).

When the VC investment closes, everyone is diluted 20%. So the founders now own 58.3% (72.8% times 80%), the seed investors own 7% (8.75% times 80%), the VCs own 20%, and the employees own 14.7% (18.4% times 80%). Of that 14.7%, the new pool represents 10%.

5) Another venture round is done with an option pool refresh to keep the option pool at 10%. See the spreadsheet below to see how the dilution works in this round (and all previous rounds). By the time that the second VC round is done, the founders have been diluted from 100% to 42.1%, the early employees have been diluted from 7.5% to 3.4%, and the seed investors have been diluted from 10% to 5.1%.

I've uploaded this spreadsheet to google docs so all of you can look at it and play with it. If anyone finds any errors in it, please let me know and I'll fix them.

This rolling dilution calculation is just an example. If you have diluted more than that, don't get upset. Most founders end up with less than 42% after rounds of financing and employee grants. The point of this exercise is not to lock down onto some magic formula. Every company will be different. It is simply to lay out how dilution works for everyone in the cap table.

Here is the bottom line. If you are the first shareholder, you will take the most dilution. The earlier you join and invest in the company, the more you will be diluted. Dilution is a fact of life as a shareholder in a startup. Even after the company becomes profitable and there is no more financing related dilution, you will get diluted by ongoing option pool refreshes and M&A activity.

When you are issued employee equity, be prepared for dilution. It is not a bad thing. It is a normal part of the value creation exercise that a startup is. But you need to understand it and be comfortable with it. I hope this post has helped with that.

One of the topics I get asked about most on MBA Mondays is "options." But options are only one form of employee equity. I am going to do a series of posts on this topic over the next month of MBA Mondays. I will start by laying out the logic for employee equity, going over some target ownership levels, and describing the various securities you can use to issue employee equity.

One of the defining characteristics of startup culture is employee ownership. Many large companies provide employee ownership so this is not unique to startup culture. But when you join a startup, you have the expectation of getting some ownership in the company and if the company is successful and is sold or taken public, that you will share in the gains that result.

Employee ownership is such an important part of startup culture. It reinforces that everyone is on the team, everyone is sharing in the gains, and everyone is a shareholder. I can't think of a company that has come to pitch us that has not had an employee equity plan. And I can't think of a term sheet that we have issued that didn't have a specific provision for employee equity. It is simply a fundamental part of the startup game.

While employee equity is "standard" in the startup business, the levels of employee ownership vary quite a bit from company to company. There are a variety of reasons. Geography matters. Employee ownership levels are higher in well developed startup cultures like the bay area, boston, and NYC. They are lower in less developed startup communities. Engineering heavy startups will tend to have higher levels of employee ownership than services and media companies. I am not suggesting that is right or fair, but it is what I have seen. And if the founders are the top managers in a company, the level of "non founder employee ownership" will be lower. If the founders are largely gone from a company, the levels of "non founder employee ownership" will be higher.

If the founders are the top managers in the company, then the typical "non founder employee ownership" will tend to be between 10% and 20%. If the founders have largely left the company, then "non founder employee ownership" will be closer to 20% and could be a bit higher. I like the 20% number as a target if for no other reason than it maps well to the VC business. The people providing the "sweat equity" typcally get 20% of the gains in our business (at USV we get 20%) and they should get at least that in the companies we back. I say "at least" because the founders are often still providing "sweat equity" and they can own much more than 20%.

There are four primary ways to issue employee equity in startups:

– Founder stock. This is the stock that founders issue to themselves when they form the company. It can also include stock issued to early team members. Founder stock has special vesting provisions among the founders so that one or more of them doesn't leave early and keep all of their stock. Those vesting provisions are extended to the investors once capital is invested in the business. Founder stock will typically be common stock and it will be owned by the founders subject to vesting provisions.

– Restricted stock. This is common stock that is issued to either early employees or top executives that are hired into the company fairly early in a company's life. Restricted stock will have vesting provisions that are identical to standard employee option plans (typcially four years but sometimes three years). The difference between restricted stock and options is that the employee owns the shares from the day of issuance and can get capital gains treatment on the sale of the stock if it is held for one year or more. But issuing restricted stock to an employee triggers immediate taxable income to the recipient so it can be very expensive to the recipient and therefore it is only done very early when the stock is not worth much or when a senior executive is hired who can handle the tax issues.

– Options. This is by far the most common form of employee equity issued in startup companies. The stock option is a right issued to an employee to purchase common stock at some point in the future at a set price. The "set price" is called the "strike price." I am going to do at least one and probably several ful MBA Mondays posts on options so I am not going to say much more now.

– Restricted Stock Units. Knows as RSUs, these securities are relatively new in the startup business. They were created to fix issues with options and restricted stock and have characteristics of both. A RSU is a promise to issue common stock once the vesting provisions have been satisfied. The vesting provisions can include a liquidity event. So when you are getting an RSU, you are getting something that feels like an option but there is no strike price. When you get the shares, you will own them outright. But you might not get them for a while.

I will end this post by imploring all of you entrepreneurs to hire an experienced startup lawyer. Employee equity issues are tricky. You can and will make a bunch of expensive mistakes with employee equity unless you have the right counsel. There are plenty of law firms and lawyers who specialize in startups and you should have one of them at your side when you are setting up your company and throughout its life. That is true for a lot of reasons, but employee equity is one of the most important ones.

A lot of the discussion about last week’s MBA Mondays post on Outsourcing was about the differences between outsourcing locally and outsourcing outside your home country. A popular term for the latter approach is offshoring.

The advent of modern electronic communications has allowed companies to efficiently source and manage labor all around the globe. This is one of the megatrends, if not the megatrend, of the current economic period we are living in.

But just because you can use labor halfway around the world doesn’t mean you should. This post is about the pros and cons of offshoring from my perspective.

On the plus side, offshoring often offers considerable cost savings. Labor costs in emerging markets are often a fraction of the labor costs in the developed world. And you can often tap into highly educated and skilled labor pools. We have companies in our portfolio that have built world class engineering teams in places like Belarus, Solvenia, and India. These teams cost less and often produce amazing work. AVC community member Ken Berger has been involved in building a strong team of ruby engineers in Vietnam. I have no doubt that team can do excellent work at a fraction of the cost of a team of ruby engineers in San Francisco or New York.

On the negative side, there are significant communication and management issues that arise when you have a team working half way around the world for you. Yes, you can Skype, IRC, Twitter, and IM all day long with your remote team. But often they want to be asleep when you want to be awake. Israeli tech teams are well known for their participation in critical product/tech meetings with their US counterparts in the wee hours of the morning. They might be in the meetings, but you have to wonder if they are at their best.

But as problematic as the communications issues are, the management issues are even harder. You can outsource the management issues by hiring a firm to do your work for you. I am not a big fan of that approach, particularly for startups. As I outlined in my post last week, I believe startups need to directly employ the people doing the most critical tasks. And for a startup, that includes things that are commonly offshored like software engineering and customer support. And even if you outsource the management to an offshore firm, you will have to manage that firm. And managing vendors is often harder than managing employees.

I have observed that hiring a local manager for a remote team is often the hardest thing to do. And you need a strong manager in place in your remote location if you are going to be successful. A weak manager of a remote team is almost always a disaster for your company. It causes delays and management messes that you will have to clean up.

The most reliable technique I have observed is to ask a trusted and experienced team member to go overseas and launch/manage the remote team. That is a big ask and often is not possible. But if you can make that work, it has the highest probability of success.

The companies in our portfolio that have done the best job with teams located in other parts of the world have had founders who came from those places or founders who spent significant time in those locations. They are able to source high quality talent and manage them, sometimes even remotely due to their familiarity with the people, place, and culture.

Speaking of culture, you can’t overemphasize what a big deal it is having multiple cultures in your company. Some cultures take it easy in the summer and work hard in the winter. Some cultures have different approaches to gender in the workplace. Some cultures value respect more than money. Some cultures value money more than respect. Multiple cultures can often create tensions between offices and teams. Managing all of this is hard and I have not seen many do it exceptionally well. But I have also observed that as this kind of organization structure gets more common, entrepreneurs and managers are getting better at handling cultural complexity.

The single most important thing you can do is get everyone, at least all the senior team members of the company, across all geographies, together on a regular basis. And I think it is not a good idea to always have the remote offices come to the home office. The home office needs to travel to the remote offices too.

As I said at the start of this post, being able to source and manage talent all across the globe may be the signature megatrend of the current economic period. It has far reaching consequences for companies of all shapes and sizes. For startups, it offers lower costs and at times access to excellent skills and talent. But it comes with great challenges and you should not undertake an offshoring exercise lightly.

This MBA Mondays topic was suggested by Aviah Laor, a regular member of this community.

I'll start this post by describing outsourcing and explain why companies do it. Then I'll talk about outsourcing in the context of startups.

Outsourcing is when a company hires another company to perform certain functions. Wikipedia defines it as "contracting to third parties." The term has become synonomous with the transfer of labor/work overseas, but outsourcing is not geographically defined. You can outsource work to the company across the hall.

The two primary reasons one company will outsource work to another company are cost and skill set. The third party outsourcing company can provide the required work at either lower cost or higher quality or possibly both. Sometimes time is also a factor. It is often the case than an outsourcing company can get the job done faster.

All kinds of business functions can be outsourced. I have seen almost every part of a business outsourced at one time or another. But the most common things that companies outsource are software engineering, data entry/data hygiene, customer service, tech support, and financial record keeping/reporting.

Startups are among the most active outsourcers. It makes sense. Typically the founding team has skills in one or two areas and doesn't have the entire set of skills to launch a business. So they outsource the tasks they don't have the expertise in. This can be a good thing but can also be a bad thing.

Specifically, I think it is always a bad thing for the founding team of a software company to outsource software development. We see this a lot. A team will come into our office and pitch us. When I ask how many people they have, they say "this is all of us". Then I say, "who is writing code?" And they say, "we've hired a company to do that for us." That is a very disappointing moment for me because it means we almost certainly won't invest in that team. We believe that software companies must own their most important capability themselves and that is the ability to produce their product in house.

The founding team of a software company should have a strong product manager on it (often that is the founder) and should have at least several strong software developers on it who can write most of the code. It does make sense to outsource some parts of software engineering from time to time. A common thing we've been seeing recently is outsourcing the development of a blackbbery app or some other kind of mobile app. Right now, that is still a fairly nascent skill set but we are also advising most of our portfolio companies to bring individuals in house to do that work because it appears that mobile app development will be a key skill set for our portfolio companies for some time to come.

It is tempting for startups to want to outsource customer service and tech support because these are labor intensive activities that can be fairly easily outsourced to a call center, either in the US or even outside the US. At some point, most companies will outsource some of all of this work. But we do not believe startups should outsource this work until they are "all grown up" (whatever that means). Customer service and tech support are the best way for startups to talk to their customers. Sometimes it is the only way startups get to talk to their customers. And customer feedback is so very important to startups so it is critical for them to do this work in house.

Data input and data hygiene is one area that we do think startups can and should outsource. This is not strategic for most startups and is often costly and time consuming work that can be easily outsourced.

The function that most startups outsource in the beginning is financial record keeping and reporting. And that makes sense. Accounting and bookkeeping is a specific skill that most founders don't have. By outsourcing it, you make sure your books and records are kept accurately and up to date.

I am a fan of outsourcing in general. I believe companies should develop those skills and functions that are their core competency and outsource the skills and functions that are not. I believe that the US should invest in outsourcing instead of demonizing it. I believe there is a lot of opportunity for economically weak regions of the US to use outsourcing to build their economies and grow.

But for startups, outsourcing is a tricky issue. You should not outsource those things that are core competencies or critical feedback points. If you don't have the skills on your founding team to do that work, go find people who do and either hire them or bring them onto the founding team.

Last week's MBA Mondays post on What A CEO Does was a huge hit. Matt Blumberg, who is one of the finest CEOs I've had the pleasure of working with, wrote a follow-up post on the topic for his blog. I asked him if I could run it as a guest post here on MBA Mondays and he agreed.

So, here's a bit more on What A CEO Does:

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What Does a CEO Do, Anyway?

Fred has a great post up last week in his MBA Mondays series caled “What a CEO Does.“  His three things are set vision/strategy and communicate broadly, recruit/hire/retain top talent, and make sure there’s enough cash in the bank.

It’s great advice.  These three are core job responsibilities of any CEO, probably of any company, any size.  I’d like to build on that premise by adding two other dimensions to the list.

First, three corollaries – one for each of the three responsibilities Fred outlines.

    •    Setting vision and strategy are key…but in order to do that, the CEO must remember the principle of NIHITO (Nothing Interesting Happens in the Office) and must spend time in-market.  Get to know competitors well.  Spend time with customers and channel partners.  Actively work industry associations.  Walk the floor at conferences.  Understand what the substitute products are (not just direct competition).

    •    Recruiting and retaining top talent are pay-to-play…but you have to go well beyond the standards and basics here.  You have to be personally involved in as much of the process as you can – it’s not about delegating it to HR.  I find that fostering all-hands engagement is a CEO-led initiative.  Regularly conduct random roundtables of 6-10 employees.  Send your Board reports to ALL (redact what you must) and make your all-hands meetings Q&A instead of status updates.  Hold a CEO Council every time you have a tough decision to make and want a cross-section of opinions.

    •    Making sure there’s enough cash in the bank keeps the lights on…but managing a handful of financial metrics in concert with each other is what really makes the engine hum.  A lot of cash with a lot of debt is a poor position to be in.  Looking at recognized revenue when you really need to focus on bookings is shortsighted.  Managing operating losses as your burn/runway proxy when you have huge looming CapEx needs is a problem.

Second, three behaviors a CEO has to embody in order to be successful – this goes beyond the job description into key competencies.

    •    Don’t be a bottleneck.  You don’t have to be an Inbox-Zero nut, but you do need to make sure you don’t have people in the company chronically waiting on you before they can take their next actions on projects.  Otherwise, you lose all the leverage you have in hiring a team.

    •    Run great meetings.  Meetings are a company’s most expensive endeavors.  10 people around a table for an hour is a lot of salary expense!  Make sure your meetings are as short as possible, as actionable as possible, and as interesting as possible.  Don’t hold a meeting when an email or 5-minute recorded message will suffice.  Don’t hold a weekly standing meeting when it can be biweekly.  Vary the tempo of your meetings to match their purpose – the same staff group can have a weekly with one agenda, a monthly with a different agenda, and a quarterly with a different agenda.

    •    Keep yourself fresh…Join a CEO peer group.  Work with an executive coach.  Read business literature (blogs, books, magazines) like mad and apply your learnings.  Exercise regularly.  Don’t neglect your family or your hobbies.  Keep the bulk of your weekends, and at least one two-week vacation each year, sacrosanct and unplugged.

There are a million other things to do, or that you need to do well…but this is a good starting point for success.

I am posting this as a MBA Mondays post. But I did not learn this little lesson at business school. I learned it from a very experienced venture capitalist early in my post-MBA career.

I was working on a CEO search for one of our struggling portfolio comapnies. We had a bunch of them. I started in the venture capital business just as the PC hardware bubble of the early 80s was busting. Our portfolio was a mess. It was a great time to enter the business. I cleaned up messes for my first few years. I learned a lot.

Anyway back to the CEO search. One of the board members was a very experienced VC who had been in the business around 25 years by then. I asked him "what exactly does a CEO do?"

He answered without thinking:

A CEO does only three things. Sets the overall vision and strategy of the company and communicates it to all stakeholders. Recruits, hires, and retains the very best talent for the company. Makes sure there is always enough cash in the bank.

I asked, "Is that it?"

He replied that the CEO should delegate all other tasks to his or her team.

I've thought about that advice so often over the years. I evaluate CEOs on these three metrics all the time. I've learned that great CEOs can and often will do a lot more than these three things. And that is OK.

But I have also learned that if you cannot do these three things well, you will not be a great CEO.

It is almost 25 years since I got this advice. And now I am passing it on. It has served me very well over the years.

 

Last week's MBA Mondays post about Bookings, Revenues, and Collections generated a number of comments and questions about sales commission plans. So I decided to ask my friend and AVC community member Jim Keenan to write a guest post on the topic. Jim's blog, A Sales Guy, is a great read for those who want to get into the mind of a sales leader. So with that intro, here are Jim's high level thoughts on setting up commission plans. I know the discussion on this post is going to be a good one. So make sure to click on the comments link and if you are so inclined, please let us know what you think on this topic.

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I get asked a lot how to build a good commission plan.  I give the same answer every time.  Keep it simple and align it with company goals.  

It amazes me how often companies screw this up.  

Sales people are coin operated.  Tell them they get a buck if they go get a rock, you'll get a rock, a whole lot of rocks.  Tell them they get two bucks for red rocks, you'll get a lot of red rocks, but fewer rocks in general. 

Sales people don't hear what you say; they hear what you pay!
 
Commission plans need to do two things; motivate sales people and sell product.  They should align what you say, with what you pay.

The killer commission plan starts with two critical questions;
1) What do you want to sell?
2) How do you want the sales team to behave?

Commission plans drive behavior, get it wrong or don't align commission incentives with the company’s goals you’ll get everything you don’t want and little of what you do want. 

What do you want to sell? Do you want to sell your existing products or your new products?  Do you want to sell your services or your software?   Do you want more revenue or higher margin?   Answering these questions up front matters.  Whatever you put in your commission plan you WILL get.  Build your plan for what you want to sell.

How do you want the team to behave? Do you want new accounts and new business or more business from existing accounts?   If you want new accounts pay for hunting, if you want them to work the accounts you already have, then pay for farming.   What ever you pay for you WILL get.  Build your plan for how you want the team to act.

The key is to sit down with finance, product and marketing with the budget in hand and ask the questions; what do we need to sell by the end of the year?  Where do we need the business to be?  How much revenue do we need?  How much margin do we want?  How many new customers do we need?  How much growth are we looking for?  How do we define success at the end of the year?   Once these questions are answered, incent the sales team to do exactly that.  What ever you pay for you will get. 

Once the incentives have been nailed and properly aligned, make the plan dead, stupid, simple.   Don’t overcomplicate it.  Don’t try to be sophisticated, creating fancy algorithms and fancy spreadsheets filled with if/thens.   Make the plan "simple stupid."

A plan is simple stupid if a sales person knows exactly what they will be paid on a deal without looking it up.  Simple plans motivate sales teams.  They know what their deals are worth and chase them accordingly. 

Complicated plans de-motivate.   When sales doesn’t know how much they will get paid on a deal, motivation is nipped.   Make sure it’s easy for sales to figure out what they get paid on a deal by deal basis.  

In addition to being dead, stupid, simple, all plans must have accelerators.  Don’t be greedy.  Don’t look to cap sales earnings.  If they are selling more, pay them more.   Accelerators are when more commission is paid for a deal after a certain threshold is met, usually quota.

Finally, AND most important, once the plan is done DON'T MESS WITH IT.  Nothing is more detrimental to a sales environment than changing the commission plan on the fly.  You have to live with what you have. 
 
Commission plans are the lifeblood of a sales team.  Get them right; start counting the money.  Get them wrong; it’ll be a long year.   

Remember; Sales people don’t hear what you say, they hear what you pay . . . so pay right.

A reader suggested this topic for MBA Mondays. It is a good one.

When a customer commits to spend money with your company, that is a “booking”.  A booking is often tied to some form of contract between your company and the customer. The contract can be simple or very complicated. And some bookings do happen without a contract. Examples of these contracts with customers include an insertion order in advertising, a license agreement in enterprise software, and a subscription agreement in “software as a service” businesses.

Revenue happens when the service is actually provided. In the case of advertising, the revenue is recognized as the ads are run. In the case of licensed software, the revenue is recognized when the software is delivered and accepted by the customer. In the case of a subscription agreement, the revenue is most often recognized ratably over the life of the subscription.

The customer’s cash shows up in your company’s bank account when it is collected. That can happen at the time of booking the business (as is typical in subscription businesses), or it can happen at the time of revenue recognition (as it typical in ecommerce), or it can happen a long time after revenue recognition (as it typical in advertising).

It is important to track all three of these metrics very closely. You want to know how much revenue your company has booked, you want to know what your monthly revenues are, and you want to know how much revenue you have collected, and most importantly, how much you have not yet collected (that is called Accounts Receivable).

It is also possible to collect cash at the time of booking in advance of when the revenues will be realized. That is called deferred revenue and it is a liability because delivery of the revenue is an obligation of the company. Many companies have four revenue oriented items they track; bookings, deferred revenues, revenues, and collections.

An interesting metric that many analysts and financial managers track is the book to bill ratio. You get that by dividing monthly (or weekly or quarterly) bookings by the revenues in the same period. If bookings are lower than revenues, that can be a negative sign. If bookings are a lot higher than revenues, that can be a positive sign. But it can also mean that your company is having a hard time getting revenue realized.

In some industries, not all bookings turn into revenues. In the advertising business, for example, it is often the case that not all the booked business can be delivered (and thus recognized as revenue). This is a big issue in highly targeted advertising businesses. If you have such a business, it is important to track your yield which is the percentage of booked revenue that you actually deliver in a given period.

I like to think of the bookings to billings to collections as the way revenues “flow” through the business. And since revenues are the life blood of any business, it is important to understand your company’s specific flow and measure it along the way.

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.