Valuation Method of Equity-based Security Token Offerings (STO) for Start-Up Companies

• Main Author: Jay Pazos
• Format: Article
• Language: English
• Published: The British Blockchain Association 2019-01-01
• Series: The Journal of The British Blockchain Association
• Subjects: discount rate; Valuation; startup; security token; security token offering; STO; Venture Capital; JBBA
• Online Access: https://jbba.scholasticahq.com/article/7180-valuation-method-of-equity-based-security-token-offerings-sto-for-start-up-companies

In this paper, we develop a novel valuation method of equity-based securities token offerings (STO) for start-up companies. The closed-form discount rate function discovered in this paper is time-dependent and piecewise. The first part of the functionis exponential; the second part is a power function. The reason is that, in the early years, the probability of survival of start-up firms descends more rapidly than in late years. The probabilityof survival function discovered has a remarkably good fit with empirical data-for the total of firms and ten industry sectors for which data is available. For the totalof firms, we found that the highest discount rate has a 27.0 to 31.8% range when the liquidation value of the non-surviving start-up project is zero; this is considerably higher than observed discount rates of projectsfor mature firms (7.5%) but considerablyless than some published discount rates for start-up projects financed by VentureCapital firms (40.6 to 70% range). To demonstrate the model, we work a valuation example in section six. A valuation method for equity STOs will help to develop a more transparent market for start-ups wanting to raise capital. Most importantly, our results show that for many start-up firms, equity STOs could be an economicalalternative to raise capital.