In terms of capital pricing, as with any venture capital investment, two critical pieces of information need to be developed and published to potential investors in the indicative Investment Terms (KIIS): one is the pre-money company valuation, also known as enterprise value (EV), and the other is the expected return.
1) Equity pricing, pre-money valuation: In equity-based crowdfunding, typically small or fractional shares are offered – depending on the maturity of the Campaign Owner’s business. The company valuation is determined by the Campaign Owner, which TokePortal preliminarily validates based on the financial plan, any previous investment rounds, and peer analysis. Campaign Owners often stick to their company valuation, while the amount of capital to be raised and its terms are far more important. If investors do not accept the company valuation, the campaign will fail, or the company valuation must be modified during the campaign.
2) Return expectations and exit strategy: Although it may seem distant during the campaign preparation and capital raising, the business pays the price of capital in terms of profit and return. In equity-based crowdfunding, this is often more favorable than in venture capital funding. Typically, it is known in a given market situation what level of return institutions invest in. At the time of writing this document, it was typically 8-10% annually. This means that in case of an exit or acquisition, investors receive a payout corresponding to at least 8% annual return on top of their capital, and the founders get the remaining amount. It may happen that previous investors, if any, take precedence over subsequent investors in sharing the return (This is called a “waterfall”, and it is included in the Investment Terms). A successful exit meeting return expectations typically occurs 6-10 years into a typical startup’s lifecycle, hence the investment decision should also be made for such a time frame. For investors to see what kind of exit to expect when making an investment decision, the Campaign Owner must have an exit strategy, i.e., market knowledge and foresight about what kind of acquisition or IPO is realistic over what time frame and must build a business that facilitates such an exit.
Additional article on the topic: Everything You Need to Know About Startup Valuation Methods.