A Guide to Early Adoption Benefits When Investing

What is an Early Adoption discount?

Early adoption is a mechanism that allows investors to buy shares at a lower valuation and share price.

Entrepreneurs reward investors who commit to a proposal earlier on in its investment process. It typically takes the form of a first-come-first served discount, on the fair value of the company. It has several tiered discounts, depending on how early the investment is committed.

While this works similar to a bonus where investors would receive more shares for the same investment, an early adoption discount mathematically gives investors more shares than a bonus of equal value would do.

What does this look like?

Let’s assume a business with a pre-money valuation of $1.8 million is looking to raise $200,000. Ordinarily, this would mean that investors are collectively buying 10% of the business for that $200,000 for a post-money valuation of $2 million.

However, let’s look at how the following discount scheme will affect the raise:

In other words, the earliest investors will be buying shares at a valuation of $1.44 million instead of $1.8 million.

Because the company is giving away a higher number of shares (in this example, it will give away $220,687.13 worth of shares), the final equity percentage collectively purchased by the investors is 10.92% instead of 10%, placing the ultimate post-money valuation at $2.02 million.

Here’s what this will look like for an individual investment of $10,000 at the various tranches:

Notice that the investor in the final tranche (at no discount) owns significantly less than the highest discounted tranche for the same investment. So, how to own more shares with the same investment? Invest at the start of the campaign rather than at the end.

What happens when the company exits?

Investors in an early-stage business do so with the hope of receiving a return on their investment through either regular dividends payments, or a company buyout, where a larger competitor purchases the company.

When this happens, investors will sell their shares at the new valuation that has been negotiated with the buyer.

This is where the early adoption discount received really shines.

Using the same example as above, let us assume that the purchase price has been set at $5 million. To keep things simple, let us also assume that there have been no follow-on rounds between the time of the investment and the sale of the company. *

The below graph details the returns that each of the four investors, from the above example, will receive at that price.

Exit: $ 5,000,000.00

This is further compounded should the price be set higher. Let’s see what happens at a valuation of $10 million:As you can see, the discounted share price at which the investment was made compounds the returns significantly, leading to a 60% difference in RoI (roughly $6,000 in profit) for the same $10,000 investment.

Exit: $ 10,000,000.00

Here, we see a 120% difference in RoI (roughly $12,000 in profit), again for the same $10,000 investment.

The downside?

Eureeca’s “all or nothing” model means that you will get your money back should the campaign not hit its minimum target. So, the only downside is that you’ll need to make your investments early on.

However, the benefits for a successful investment that moves on to profitability are significantly more lucrative.

Investor club members enjoy early access to all proposals before they go live on the platform, allowing them to book in the highest discount.

*A follow-on round will increase the number of shares in the company, which will reduce the total price/share at the end. In other words, the $10 million will be divided among more investors. In our example, assuming that the company issued an additional 25,000 shares after the initial round, this what the return table would look like:

Exit: $ 10,000,000.00