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Valuation Methods
In most cases, the EIC Fund will not be valuing companies which apply for funding via the EIC Accelerator programme. For the purpose of equity investment, the EIC Fund will generally adopt the valuation as set out by the private co-investor(s) since this would represent a market value.
A non-exhaustive list of valuations methods used by the private market can be found below:
Multiples of earnings
A company's value can be calculated by multiplying its revenue by a pre-determined multiplier. Factors such as industry, sector, business stage, and economic climate (just to name a few) can influence the size of the multiplier.
Fair market value
"With this method, the value of the company is determined by using the price that the company would sell for on the open market. This method assumes a fair market with interested buyers and sellers. The prices of similar companies that have been sold in the market may act as an appropriate benchmark." (Source: EIC Investment Guidelines).
Book value
It takes into consideration the value of the business’s equity by taking into account the market value of the assets (not the accounting value in the financial statements), intangible assets (goodwill created at the time of the valuation) minus total liabilities (eventually adjusted if there is a relevant swing in the cost of debt).
Price of recent investment
As the name suggests, this method looks at the price of previous funding rounds and uses these prices as reference points. The value of the company is then estimated using these reference points.
Discounted cash flow
The DCF valuation method is calculated by forecasting future cashflows and then discounting them by the weighted average cost of capital. The discounted cash flows are added, returning the present value of the company. However, this method is not commonly used to value startups because of the uncertainty associated with the projected future cash flows.
Other asset-based methods
Asset-based approaches use the value of the company's assets to calculate its value.
Possible Forms of Investment (Equity or Equity-type Investments)
As stated in the Investment Guidelines document, "The financial instruments used by the EIC Fund will
take, in priority, the form of equity or quasi-equity investments".
A list of standard equity and quasi-equity investments can be found below:
Common shares
A common share is an asset that represents ownership of a company. If all the shares are owned by a single individual, then that individual owns the entire company. Common shares can be divided into different classes, which may or may not give holders the right to vote on policies suggested by the Board of Directors.
A company may wish to distribute earnings to shareholders in the form of dividends. The Board determines the value of these payments and whether or not they are paid at all. Lastly, common shareholders are last in line to receive liquidation proceeds in the case of bankruptcy.
Preferred shares
A preferred share is deemed to be a hybrid asset in that it lies somewhere between a bond and common stock. It is similar to a common share, but a preferred share ranks higher in terms of seniority. This means a preferred shareholder is entitled to dividend payouts or liquidation proceeds before a common shareholder. Note that some preferred shares do not come with voting rights.
Convertible instruments
A convertible instrument is a debt instrument with a convertibility feature attached to it. This makes it attractive to the issuing company since they are aiming to postpone dilution until the company’s next equity funding round. They offer flexibility to investors allowing them to shift the risks and rewards of their investment to some point after the initial investment.
Convertible instruments are offered when beneficiaries are labelled as a 'bucket 1' case. This means the beneficiaries are not ready for private investment because they remain high-risk despite being awarded the EIC Fund grant.
Other equity-type instruments
The EIC Fund may offer a different form of investment to achieve the EIC Accelerator's objectives.