Valuation Method of Equity based Security Token Offerings (STO) for Start Up Companies
The major difficulty to value equity security token offerings (STOs) is the gap in the corpus of finance theory to quantify the discount rate 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 function is 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 probability of 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 total of 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 projects for mature firms (7.5% but considerably less than some published discount rates for start up projects financed by Venture Capital 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 economical alternative to raise capital.
The Journal of the British Blockchain Association