In early 2007, Bo Brustkern opened the doors of
He was convinced that business valuation was a burgeoning opportunity to the venture-backed world, and for good reason. Two years earlier, Section 409A—which regulates the treatment for federal income tax on “nonqualified deferred compensation” paid by a company to its employees and board members—had become part of the U.S. tax code. Thus, startups began needing a third party to tell them what the value of their common stock was when it came to valuing options.
“It used to be that startups needing to issue options to employees would determine the strike price by dividing the price of preferred shares by, say, 10, and that was it,” Brustkern says. “There wasn’t a lot of math going into the equation, and the IRS thought that was a bad practice.”
“It’s the cutting edge of business valuation, but it’s a very difficult realm to value on a fundamental basis,” says Brustkern, founder and managing director of the firm.
For example, he says, “You can look at forecasts of companies, but unless they are very mature, it’s hard to build a whole lot of credibility into those forecasts.”
Meanwhile, he says, “an asset approach is ridiculous in almost any case with a company with growth potential” and “the market pricing they receive from VCs will likely be frothy and not indicative of underlying value.”
Brustkern, a graduate of Dartmouth College and UCLA Anderson School of Management, has plenty of competitors, including SVB Analytics, a subsidiary of Silicon Valley Bank; the national network American Business Appraisers; and Intrinsic Valuation, based in his own backyard of Denver.
Partly, that’s why Brustkern—a onetime senior associate at Rustic Canyon Partners and a former senior vice president at the venture-backed online accounting startup Corefino—has expanded Arcstone into several areas of business valuation.
Though 409A work remains a “staple” of the business and accounts for roughly one-third of its revenues, Arcstone, which now employs seven people, also tackles financial reporting, tax work, litigation support and transactional engagements, such as when a company sells to another entity and questions later arise over the fairness of the transaction.
One of his better-known competitors, Denver-based Shareholder Representative Services, was co-founded by Paul Koenig, a former Arcstone attorney. Arcstone, similar to SRS, handles disputes over everything from patents to disclosure to working capital price adjustments.
One of Arcstone’s largest cases right now involves a company that once enjoyed a billion-dollar run rate and that is now out of business owing to a “group [inside the company] behaving badly,” he says, though he declines to identify the client.
In late May, Arcstone launched an equity research arm that compiles reports on private companies that are trading through SharesPost and SecondMarket, which connect buyers and sellers of stock in privately held companies (see story, page 1). Its fees are built into the purchase price of the shares sold.
Similar to an investment bank, Brustkern says that Arcstone is trying to create a way for companies to participate in their valuations by promising to give a fair and unbiased opinion of value relating to the company, while promising to keep its information private.
“We’re trying to create transparency in a market that’s trying to be liquid but can’t possibly be liquid without better information,” he says. He adds that “valuing these companies,” most of which have between one hundred million dollars and a billion dollars in revenue, “is a lot easier than valuing garage startups.” —Constance Loizos