[jeronpaul]

The fact is that nobody can really know with certainty the true valuation of an early-stage company. Even venture investors just come to a negotiated deal and subsequent events often prove them wrong. That said, the definition of true value is probably whatever price is implied by a market deal between a willing seller and buyer both of which have access to all relevant facts and neither of which is under any compulsion to do a deal (so basically a venture capital transaction would qualify). The article correctly points out that valuation firms aren't market participants (i.e., actual buyers) so they are just doing their best to guess at a value--not establishing a value. The article also points to false precision--which most honest valuation folks agree to. They still have to do their best to come up with a defensible valuation but they recognize that it is just an educated guess. Finally the article points to the difference between common and preferred stock prices as if that is a scam. While you can definitely debate how close the two should be relative to each other, it's totally crazy (IMHO) to say that common should have the same value as preferred.

[nugget]

On Tuesday I spend a hundred bucks and start a Delaware LLC that has no assets and no business plan - what's the company worth? Most would say $0 or close to $0.

After breakfast on Wednesday I spend a couple hours on an abstract powerpoint deck, make a bunch of phone calls, and by dinner time (based on past successes and personal network) I have $1m in seed funds committed at a $5m pre-money valuation. What's the company worth then?

It's one of the best tax incentives out there, in that successful founders and very early employees usually pay long-term capital gains on near zero-basis stock.