Technology-oriented start-ups and valuation: A novel approach based on specific contract terms

Technology-oriented start-ups and valuation: A novel approach based on specific contract terms

WoS Article

New technology-oriented ventures contribute disproportionately to the creation of innovative products, and are the main drivers of the transformation of entrepreneurship, and therefore, to local and national economies. Financial theory has traditionally emphasised the economic importance of access to external resources for fostering a start-up ecosystem; however, little attention has been paid to finding fair value for technology ventures. This is a challenging issue, as their growth is rather non-linear and has a capital structure complex because of various fundraising rounds with different classes of shares, which differ in terms of their rights, and thus, the degree of investor protection. We address this problem by proposing a novel start-up valuation model based on liquidation preferences. The main idea behind this model is that the issue of any preferred equity within a follow-up financing round is used as an opportunity to value common shares, and thus, the value of the wealth of its shareholders. After implementing the model on specific contract terms in a case study, our approach provides decision makers with significantly more accurate results than those achieved by post-money valuation, which is a widespread practice in the venture capital industry. Our model contributes to the redefinition of established valuation models, provides guidance to founders, investors, and managers, and supports better decision-making regarding the allocation of scarce resources in technology-oriented industries.

New technology-oriented ventures contribute disproportionately to the creation of innovative products, and are the main drivers of the transformation of entrepreneurship, and therefore, to local and national economies. Financial theory has traditionally emphasised the economic importance of access to external resources for fostering a start-up ecosystem; however, little attention has been paid to finding fair value for technology ventures. This is a challenging issue, as their growth is rather non-linear and has a capital structure complex because of various fundraising rounds with different classes of shares, which differ in terms of their rights, and thus, the degree of investor protection. We address this problem by proposing a novel start-up valuation model based on liquidation preferences. The main idea behind this model is that the issue of any preferred equity within a follow-up financing round is used as an opportunity to value common shares, and thus, the value of the wealth of its shareholders. After implementing the model on specific contract terms in a case study, our approach provides decision makers with significantly more accurate results than those achieved by post-money valuation, which is a widespread practice in the venture capital industry. Our model contributes to the redefinition of established valuation models, provides guidance to founders, investors, and managers, and supports better decision-making regarding the allocation of scarce resources in technology-oriented industries.

Venture capital; Valuation; Start-up; Technology; Entrepreneurial finance; Business angels

Venture capital; Valuation; Start-up; Technology; Entrepreneurial finance; Business angels

BALCERZAK, A.; ZINECKER, M.; SKALICKÝ, R.; ROGALSKA, E.; DOUBRAVSKÝ, K.

2025

02.10.2023

ELSEVIER SCIENCE INC

NEW YORK

0040-1625

TECHNOLOGICAL FORECASTING AND SOCIAL CHANGE

197

122876

United States of America

1

15

15

https://www.sciencedirect.com/science/article/abs/pii/S0040162523005619

Technology-oriented start-ups and valuation_ Published Version_03_10_2023