
The chasm between public and private valuations of ‘Unicorns’ - mcone
https://www.bloomberg.com/news/articles/2017-08-02/the-magic-behind-many-unicorn-startups-complex-stock-contracts
======
marcoperaza
The real fools are the journalists who uncritically parrot these bogus
valuations. Every so often someone will write a good analysis like this one,
but next week the headlines and buzz will be some other bullshit valuation.

Come to think of it, is there anything of significant nuance that journalists
_do_ get right?

~~~
rayiner
Legal journalism is surprisingly good. "Waymo filed a brief saying...; Uber
denied..." I think it's because there is no pretense of reaching an objective
conclusion. In other kinds of journalism, reporters typically will take
peoples' one sided accounts and present them as facts, obfuscating that state
of affairs in the name of protecting sources. But in an article about a
lawsuit, everyone acknowledges that the filings are each party's one-sided
account.

~~~
ep103
Noam Chomsky used to talk about how there are markets for good journalism.
Economic journalism for people on wall street. Academic journalism for
academics. These journalists are usually high quality, because they have to
be, their audience understands the topic material and will make economic and
career bets based on the text. By contrast, many types of mass reporting
(economic reporting for the masses) has no such constraint, and hence becomes
subject to whoever the highest bidder's spin/story is.

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elmar
You pick the Valuation, I set the Terms…

[https://medium.com/@Alexoppenheimer/you-pick-the-
valuation-i...](https://medium.com/@Alexoppenheimer/you-pick-the-valuation-i-
set-the-terms-2d2ce08b9177)

------
lettergram
I found this section astonishing:

> But not every startup is grossly overvalued. For example, researchers found
> Uber Technologies Inc. has only one instance of a liquidation preference.
> The study said Uber’s valuation of $69 billion is only 12 percent higher
> than the fair value approximation. Even at the lower estimate, Uber would
> still be the world’s most valuable tech startup.

That definitely will incentivize the current investors to make sure Uber
survives. Didn't realize this.

It's also astonishing, because hitting that valuation didn't they essentially
take a lot of the "investment" structured as loans? [1][2]

[1] [https://www.theverge.com/2016/6/14/11936316/uber-
leveraged-l...](https://www.theverge.com/2016/6/14/11936316/uber-leveraged-
loan-two-billion-valuation-travis-kalanick)

[2] [https://www.wallstreetoasis.com/forums/uber-
last-35b-raise-d...](https://www.wallstreetoasis.com/forums/uber-
last-35b-raise-debt-disguised-as-equity-technical-disc)

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mooreds
Aren't all private market valuations fiction? I don't think investors in
private placements are wrong on trend (they're smarter than I am and spend all
day tracking this stuff) but as far as actual numbers, I don't believe them.

Public market valuations are a bit fictitious as well, but at least your
holdings in those companies are:

    
    
       * regulated to the point you can compare across companies
       * forced to be truthful by law
       * liquid so you can move in and out of positions at will

~~~
Bartweiss
As linked elsewhere in this thread: [https://medium.com/@Alexoppenheimer/you-
pick-the-valuation-i...](https://medium.com/@Alexoppenheimer/you-pick-the-
valuation-i-set-the-terms-2d2ce08b9177)

Private valuations combine "assessing value" with "striking a deal". I don't
think it makes much sense to treat them as real numbers when it's possible for
people to say things like "we don't want a down round later, value us at 20%
less than that".

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rahimnathwani
> The study found that it can exaggerate a company’s valuation by as much as
> 94 percent.

Whilst it may be technically true, it's not useful to employees granted common
shares. You might naively think you should haircut the value of your stock by
50% to get a fair valuation. But that's not true. Depending on the exit/IPO
valuation, a liquidation preference could reduce the amount paid to common
shareholders by anything from zero to 100% (i.e. infinite overvaluation of
common equity).

> The study said Uber’s valuation of $69 billion is only 12 percent higher
> than the fair value approximation.

Yes, if a company's valuation goes up significantly between rounds, then the
liquidation preferences (which are a form of downside protection) will have
less (or perhaps) zero effect.

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cubano
I find this really enlightening when all I've ever heard about from the under
30 generation was how they were going to "do thing different" and always apply
social conscience.

 _The study found that it can exaggerate a company’s valuation by as much as
94 percent._

 _Ratchets can inflate a startup’s value by 56 percent or more, the study
said._

etc.

Many if not all of these "techniques" sure sound old school to me.

~~~
JMCQ87
Most of the VCs and probably the majority of founders involved is above 30, I
would think.

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mikekij
I'm surprised to see them framing a liquidation preference as an unusual
provision. Don't almost all venture deals include a 1x liquidation preference?
Seems like a reasonable protection for an investor putting money into a
company with no revenue or assets.

~~~
api
1X is normal. 3X is nutzo.

Tl;dr on this article is that a private valuation is more than a number. The
whole picture must be considered. A high valuation with onerous terms might be
"lower" than a lower valuation with reasonable or especially favorable terms.

One thing I don't get is: isn't a lower valuation on good terms better for
founders? Why are founders playing the unicorn game at all?

~~~
JonFish85
Well, for starters, there's the image part of it: the higher the top-line
number, the more prestige comes with that.

Then there's the potential that the founder has taken money off the table
(giving up on-paper money for cash), so even if the deal isn't quite as nice
as it could be, they still own a significant portion of a "successful"
company.

Also, the higher the top-line valuation, the more free marketing you get (the
headlines read the same, just with a bigger number in it). This can translate
into an easier time of hiring, and the ability to hand out smaller and smaller
slices of equity for that top talent (employees generally will never see the
term sheets to understand that even their 0.01% of the company is likely to be
worth very little).

Obviously some founders will optimize for the former (lower valuation for
better terms); others will be more interested in ratcheting up that top-line
number to attract future investors, high-value employees, book deals, press,
etc. That's ultimately the founder's prerogative.

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ThrustVectoring
A lot of the preferred equity terms really make them much more like bonds than
common stock. Quick quiz, what's the difference between a zero-coupon
convertible bond and preferred stock with a 3x liquidation preference?

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smogcutter
This seems inevitable when the goal of an IPO is to cash out early investors
rather than raise capital.

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frgtpsswrdlame
We can label it with all sorts of names but at the base level it's just old-
fashioned corruption. Favors for favors and I-scratch-your-back kind of stuff.

~~~
cal5k
No, we can call it the result of negotiation between companies and investors.
It's not at all uncommon for investors to use a liquidation preference as a
negotiating point to counter founders' demands for a higher valuation.

~~~
frgtpsswrdlame
That's the point of the article! What do those negotiations do?

>The tools used to negotiate a higher share price with investors often come at
the expense of employees and early shareholders, sometimes drastically
reducing the actual value of their stock.

Come on, it's corruption. It's people at the top playing numbers games so they
can make a lot of money while basically defauding all the people at the bottom
who should also stand to make a lot of money.

~~~
cal5k
The negotiations allow founders and investors to arrive at an agreeable set of
terms by which investors put money into the business.

You have a very strange view of venture capital.

~~~
frgtpsswrdlame
>The negotiations allow founders and investors to arrive at an agreeable set
of terms by which investors put money into the business.

You're ignoring everybody who's not a founder or investor. There are people
with stakes in this process who aren't founders or investors who are important
too you know.

>You have a very strange view of venture capital.

In today's climate I definitely do.

~~~
vkou
> You're ignoring everybody who's not a founder or investor. There are people
> with stakes in this process who aren't founders or investors who are
> important too you know.

You mean the employees? Sucks to be them.

~~~
cal5k
Why does it suck to be them? If all goes well their options will be worth
something. If it doesn't they'll have no value - that's how equity works. If
you want guaranteed, predictable outcomes, negotiate for a higher salary in
lieu of equity or go work for a company that isn't on the VC rocket ship.

The founders are also taking a huge risk by taking on a liquidation preference
>1x... if everything doesn't go well they could be completely wiped out or
substantially diluted, as was the case with Blue Apron.

