Suppose pre-financing, the company is worth $5M, and no matter how bad things go, it'll never fall below $1M. (due to patents, brand name recognition, the VC's ability to arrange an acqui-hire, or whatever)<p>If you invest $1M with a 2x liquidation preference, the valuation doesn't matter. You're guaranteed $1M back no matter what. If it's a home run, you still get the upside.<p>When you get a 2x liquidation preference, you can afford to invest at a much higher valuation than the "real" valuation of $5M, because your downside is limited, and you get a greater share of any upside (especially if you got participating preferred). Even on a fire sale for $2M, you still got a 100% return on your investment. Instead of selling $1M of common shares at a valuation of $5M, they can raise $1M of 2x preferred at a valuation of $10M-$20M+.<p>A lot of these valuations are funny money, because the headline doesn't mention the preferences given to the investment. If they were selling common shares, it'd be a much lower valuation.
Recovering startup lawyer here....<p>The terms they are pointing out here are basically the same as you'd find in any equity financing post seed round. Seems strange to flag such common terms as evidence that there's something strange about these high-valuation financings.
Interesting. The likely source for these data are the companies' corporate charters. These are all available to the public at the Delaware Secretary of State's office.<p>You can tell because they only discuss terms that go in the charter. Other things like registration rights go in separate contracts between the company and its outside investors.
Can anyone point to a deal where liquidation prefs are exercised? Because any buyer would have to be crazy to let those stay in place. (If you're buying for a price that the liquidation kicks in, then it's not a giant success and there are usually a dearth of options for the investors so they'd rather cave on the liquidation prefs than no deal.)<p>It used to be that they were terms for throwaway during acquisition, but perhaps things have changed.
So the preferred investors still get 100% of their investment even if the valuation goes down 90%? If that's the case, these valuations are completely fictitious.<p>No surprise there. I always assumed someone had come up with a new way to manipulate perceived value. Back in the dot com bubble they did that via extremely thin floats in IPOs.
Another way to value these Unicorns is to look at common stock sold on the secondary markets which has no preference attached. Based on the deal flow I see, I am guessing Pinterest could sell hundreds of millions of dollars worth of common at 8 or 9 billion in valuation. I think a new preferred round would be in the low teens billions for them. So some discount but not a huge one.
So now that even my high school friends are on the lookout for these big IPOs, they might not happen so fast, because the companies will have to really bring in the revenues to justify those valuations before going to market?
The reason valuations jumped so high is because the 'unicorns' and the rest of the SaaS sector have gotten so much better at capturing value. Obviously that's not a bubble scenario. However, there will need to be an adjustment period where these companies are hitting their targets, or they face to loose some value immediately after the IPOs. Does that make sense? Is that bad at all?
pg head scratcher:<p>"Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that.
I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly."<p><a href="https://news.ycombinator.com/item?id=6896833" rel="nofollow">https://news.ycombinator.com/item?id=6896833</a>