
Square’s S-1: Ratchets and Unicorn Valuations - prostoalex
http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and-unicorn-valuations/?ncid=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29
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dantillberg
I don't always believe in scare quotes, but we probably ought to use them
around "valuations" promoted by companies raising private capital.

I own a tiny bit of common stock in a private company (by way of ESOs), and I
have a hunch that virtually all of the rest of the stock is in preferred
shares of some sort. And thus I have no idea how much my stake is worth. For
all I know, it's zero.

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tibbon
Does anyone have tips as someone with ESOs how you can get a better idea of
the value and your position, given preferred shares?

I feel you _never_ have as much diligence/information as an employee as a VC
would who is investing in the company.

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JonFish85
You don't, and probably for a few reasons. An employee is not seen as being as
important to the company as the people with many millions of dollars. "Open up
your books or I won't come on board" won't make the company think twice about
letting you leave. If a VC with $25m wants to look at the books, the company
will at least think about it.

On top of that, the people with millions of dollars can hire much better
lawyers and such who can truly analyze a company a lot better than your
average employee.

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cypherpunks01
My company runs about ~1M/yr revenue on Square and this morning I got an email
from them: "Own a part of Square". It seems to be some opportunity to buy IPO
stock through a company parterning with them called "LOYAL3". Anyone have
insight into the bigger picture here?

Full text here: [http://pastebin.com/X4EYq610](http://pastebin.com/X4EYq610)

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vskarine
I've subscribed to IPO notifications in E-Trade and they usually invite me to
participate in some unknown IPOs. They've never sent me any invite to
participate in any high profile IPO, which to me means whatever they send
could not find enough interest. Couple of days ago I received E-Trade email
telling me I can participate in Square's IPO. Putting this together and the
fact that you got the invite as well, I suspect they are having trouble
filling up IPO as there is just not enough interest from high profile
investors. Clear sign to stay away.

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robertspangey
If you're not going to use your IPO allocation I'd appreciate a PM with your
token number.

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akg_67
> Companies get their shiny unicorn valuation (which helps with _recruiting_ ,
> in addition to being the vanity metric du jour)

Only losers appear to be employees in the end.

> Additionally, issuance of participating preferred stock is on the rise,
> having been issued in 5 percent of deals in the Fenwick & West study.

Lesson: don't join a startup unless you get preferred stock. Value of common
stock awarded to an employee = $0.00 x millions of common stock awarded.

> This “double-dip” was common following the dot-com bubble, but had
> disappeared in the recent bull-run in VC.

Looks like shenanigans of dot-com bubble are back. Who says current market
doesn't look like dot-com bubble? They should quit smoking whatever they are
smoking.

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JonFish85
>Lesson: don't join a startup unless you get preferred stock.

Who gives out preferred stock to employees? I don't even know that founders
get preferred stock, generally. If any employee asked for preferred stock at
any company I've ever worked for, you'd immediately end the conversation,
whether you were an engineer or C-level.

All stock grants have to be approved by the board, and I don't know of any
board that's going to bend on "hey, we really wanted this engineer, we had to
give her preferred shares".

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not_that_noob
This is a double whammy for employees - not only is the IPO valuation lower
than the prior round, their stake is being diluted in the process. Definitely
not a win for them.

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JonFish85
God it would suck to have joined fairly recently, if you were banking on the
options being worth anything. You have to wait to vest, your stock options are
possibly underwater (depending on the 409a), even your vested options are
going to be locked up for quite awhile, and on top of it all you're getting
diluted.

After the lockup expires, you'd better hope to your lucky stars that the
earnings have been good, because those first few earnings are tough, and can
sink the stock price. And then on top of _that_ , there are probably very
specific windows that you can sell your stock inside of, so you have to hope
to time the ups-and-downs just right.

Lots of ways for that to bite you in the ass. I have friends who had this all
line up the wrong way as Twitter employees who joined a year or so before they
IPOed, and currently that stock isn't worth exercising.

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mason55
That's kind of the point though. Options are (at least intended to be)
compensation for a lower than market salary and a risk that the company might
go bust. At the point that you're raising a Series E round you are going to be
paying market salaries and have enough cash that the chance of going out of
business is very low. At this point you'd expect options to behave more like
RSUs in a public company where the reward is for creating value as opposed to
being a payoff for taking risk or investing your time.

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not_that_noob
I agree that the risk is lower, but the RSU analogy is imperfect because the
value of the underlying stock is the same for all holders. In this case, one
class of holders - the senior investors - will get more of the value, and this
value is taken away from other holders who thought they had more. If Larry's
stock value went up when employees and GOOG went down, there would be
pitchforks out in M View.

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kriro
20% guaranteed ROI...how does one become a series E pre IPO investor? Seems a
bit like insiders filling eachother's coffers.

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icedchai
The public will be filling the coffers: Retail investors are suckers. They'll
buy almost anything, just like in the dotbomb days.

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pbreit
I've defended private market valuations since we haven't been hearing much
about "ratchets" but will need to back-track. Yeah, Square's last round was a
"debt" round with decent upside if Square can get back on track.

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gsibble
Back on track BEFORE its IPO. Which it didn't. And now it's employees' ISOs
will get diluted. Let's just say I'm glad I didn't join when their strike
price was crazy high in the last few years.

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llamamamama
Throwaway for obvious reasons, but my current company has a very high public
valuation, but they're based on a round where the most recent investor has 4x
prefs. The valuation was just marketing.

