Section 7: EXIT STRATEGY & COMPARABLES

Your investors and other shareholders must be able to sell the stock they own in your company in order to profit from their investment. Shareholders can sell after an Initial Public Offering (IPO), a cash-based acquisition, or after a stock-for-stock acquisition by a public company.

Discuss when the company could be sold or go public and what the expected valuation of the company might be at that time. The best way to demonstrate that your will create an attractive exit opportunity for investors is to show that comparable companies have done so.

Project what your company will be worth based on the valuations of 5-10 companies that are currently at the stage that your company will advance to in 3-5 years. An effective comparable company should have a similar product and target a similar market (similar in size, type of customer, pricing, degree of competition, etc).

For example, if a startup company has a preclinical candidate for psoriasis and expects that trials will proceed to Phase III within a few years, the company could compare itself to companies today whose value is substantially based on a Phase III psoriasis drug. Other moderate-to-severe dermatologic conditions might stand in for psoriasis, and Phase II or registration-stage programs might substitute for Phase III.

Avoid referring to the exceptional cases. Unless you have good cause to project another stock market bubble during which you expect to raise hundreds of millions in capital, suggesting that your startup could be the next Millennium will cause readers to roll their eyes. Generally speaking, any company with a market capitalization in excess of $1B should not serve as a comparable for a startup company.

Use the most recent valuation for each company. Financing climates can change quickly and will be immediately reflected in the share price of public companies. Accurately valuing private companies can be difficult as their equity is re-priced only during financings. Therefore, only include as comparables private companies whose valuations have been recently calibrated by a financing, merger, or acquisition.