I'd like to see another one be written about how these emerging channels (i.e., CrowdClear, Early Shares, CircleUp, Angell List, etc.), which widen access by accredited investors access to private offerings, will approach the matter of valuation.
Will these broker-dealers consider whether the issuer's valuation is "reasonable" when deciding to sell shares? If so, what factors will be considered?
Whether they do or don't, it is likely that similar companies will be presented to investors with dissimilar valuations and other terms. In other words, greater access to capital will make it likely that an issuer that crowdfunds its capital will followed by competitors who also use crowdfunding.
For example, say the first company to crowdfund in a particular space do so by giving itself a valuation of, $30 million. Because the space is growing and competitive, another company decides to do the same thing. Although its at a similar phase of development, it claims attributes that make it more likely than the first company to generate revenue faster and more profitably. Does it assign itself a valuation higher than $30 million?
What about additional competitors? Might an addtional competitor decide to raise twice the amount the other two do but at a lower valuation?
One thing seems certain–the JOBS Act will leads to more companies raising capital from a much wider pool of investors than before.
It follows that Wild West style variability in valuation and terms will increase as a result. That's because of (a) the difficulty of establishing a fair valuation for an early-stage company and (b) the challenge of finding "comps".
Issuers that adopt the Fairshare Model will compete by offering accredited investors and, if its a public offering, small investors, a low valuation and superior investor protections.
In additon to being able offer stock options on Investor Stock, they will be able to offer an interest in their Performance Stock pool. Since Performance Stock only becomes valuable when the team performs, these companies will be better equiped to compete because they will have an advantage in recruiting and managing talent.
Based in Oakland, CA, Karl M Sjogren is a CFO for early-stage companies and those in a turnaround situation. He blogs about the Fairshare Model, a performance-based capital structure for companies that seek venture capital via a public offering. He is writing a book to promote adoption of the Fairshare Model, a performance-based capital structure, by companies that seek to raise venture capital via a public offering. The Fairshare Model balances and aligns the interests of investors and employees. Visit www.fairsharemodel.com to learn more.
Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Karl M Sjogren. This work reflects the law at the time of writing.