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

Abstract

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.