
How to Build a Unicorn and Walk Away with Nothing - whbk
http://heidiroizen.tumblr.com/post/118473647305/
======
idlewords
I find this article much more interesting as a cultural snapshot than a
cautionary tale for founders. $20 million in investment before creating a
minimal product, $200 million to find out users won't pay for what you made,
and everything propped up by a shell game around online ads. The assumption
that the founder of this should have walked away with a fortune is just the
cherry on top.

~~~
nostrademons
I think that's part of the author's point: that valuations are, in a very
important sense, largely fictitious, and that other actors in the ecosystem
can make your valuation as large or as small as possible to suit their
purposes. If you want to build a business, your actions need to actually _do_
that, and you should be aware of and mitigate the implications of any wild
valuation swings. Similarly, if you want to get rich (which may or may not be
aligned with building a business), your actions should do _that_ , and that
also may or may not follow from getting a big valuation.

~~~
paulpauper
As lot of people are saying that, but the empirical evidence suggests that the
valuations, as high as they are, are remarkably sticky. I can only name two
web 2.0 duds, zynga and fab, but the rest of the unicorns have either held
their value or keep rising. It's not like Uber or Snapchat will become the
next friendster and myspace. The failure rate for the $40-90 million valuation
range seems much higher than the >$1 billion.

~~~
lacker
Zynga is still worth $2.6B so I would not call them a "dud".

[http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics](http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics)

~~~
iaw
They've also lost $225 million in the last year. They have a $2.6B market cap
but what does that mean if they still aren't making money?

~~~
MichaelGG
Twitter's also losing money, right? LinkedIn, despite all their tactics, makes
double digit millions only? Splunk, at several billion valuation loses more
and more money, too (enough that killing all R&D _still_ wouldn't make them
profitable).

~~~
ghshephard
Splunk's revenue chart looks great:
[https://ycharts.com/companies/SPLK/revenues_ttm](https://ycharts.com/companies/SPLK/revenues_ttm)

When you are still growing, the goal is to invest as much as you can in
further growth. Taking profits just means you pay taxes.

The only problem with losing money is if it's not the result of increasing
growth (which can later be turned into much bigger profits)

------
simi_
And yet nobody sees a problem in creating stupid crap for stupid users and
expecting to ~break even~ get rich selling ads.

This reminds me of a recent article [0], where this line stood out:

> “We just introduced an emoji feature and comments are there so you can have
> conversations, and there’s more stuff in collaborative streaming that we’re
> going to introduce,” he added.

"We found a new niche and Twitter is trying to bully us out of it, but look,
we'll have emoji soon. Comments too, and more social stuff. It's going to be
great!" Sorry to cherry-pick Meerkat, they're actually an OK bunch, but that
quote just stuck with me.

Add to this silliness how much money/interest is garnered by apps like
Instagram, Snapchat, WhatsApp (actually, arguably solving a real problem), and
it's hard to argue we're not in a similarly idiotic bubble to the previous
one. Of course, this also creates valuable stuff (my favourite recently being
Slack), but I'd be willing to bet that this huge BS-to-usefulness ratio isn't
sustainable in the long term.

0: [http://techcrunch.com/2015/05/06/meerkat-founder-on-
getting-...](http://techcrunch.com/2015/05/06/meerkat-founder-on-getting-the-
kill-call-from-twitter/)

edit: instant downvote - if you don't just disagree with my tone, please
explain why you think I'm wrong

edit 2: I'm not saying I have an answer, but at least I tried to pick
something that seemed worth doing (I work at Lavaboom, we're trying to make
encrypted email easy to use - with extra privacy sprinkled on top)

~~~
PavleMiha
I think the issue people have with your comment is that you seem to label
things you don't use as stupid crap for stupid users. Snapchat, Instagram and
WhatsApp solve a very real problem and are very useful for the hundreds of
millions of people that use these services multiple times a day.

It seems that you only label stuff as valuable if it solves problems you have
(Slack and Lavaboom).

I'm not a daily Instagram user, but some of my friends love it. They're not
dumb, they just get more enjoyment out looking at and sharing pictures of cool
shit and their friends.

~~~
AndrewKemendo
_It seems that you only label stuff as valuable if it solves problems you
have_

The idea that things that are popular are "solving a problem" is a really bad
trend in my opinion. "A problem" is something that has generally identifiable
boundaries and detrimental implications if not solved - for example not being
able to send someone money is a problem, and one big enough that it warranted
the creation of paypal and the like.

I doubt highly that the millions of snapchat users at some point said "If only
there were a service that deleted my pictures 10 seconds after I took them."

The major differentiation in my mind between a service that "solves a problem"
and another "bullshit service" is whether people are willing to pay for it.

That's not to say you can't get rich off of bullshit, the E! network among
others is proof of that, but lets not fool ourselves into thinking these
things actually make the world better.

~~~
detaro
"How do I quickly share pictures without having to worry to much about them
sticking around" is the problem snapchat claimed to solve (and does a
reasonable job of solving, despite obvious limitations).

People might have actually been willing to pay for that, but if you charge
money from the beginning for this kind of thing, someone else just offers it
for free and tries to monetize it after they got all "your" customers.

~~~
AndrewKemendo
_" How do I quickly share pictures without having to worry to much about them
sticking around"_

See, to me that falls into the "problems I didn't know I had" \- like for
example a lack of a terra cotta animal that I can grow sprouts on.

------
krampian
Of course terms matter, but the example she gives seems somewhat contrived.
Particularly this part:

>> In the deal, Hooli would invest $200 million for equity while in return the
two companies would enter into a business development agreement on the side in
which Pied Piper guarantees to spend that money in a massive consumer campaign
on Hooli’s ad platform. They float the magic “B” valuation. Richard goes to
sleep dreaming of rainbows and unicorns.

If you take all that money in with a _massive_ string like that attached
(basically no freedom at all to spend it except on one thing), I would think
you have only yourself to blame for the result.

~~~
chetanahuja
_" If you take all that money in with a massive string like that attached.."_

Not to mention, this happens when you already have outside board members from
your previous round of investment. So it's not just one dumb CEO making the
deal, it's aided and abetted by (presumably wiser and cannier) prior
investors. Yeah... that part rang the most untrue in that whole scenario.

Take that out, and the rest of the story is basically a parable explaining
what liquidation preferences mean. Is there _any_ VC that would do a deal
without 1x liquidation pref?

~~~
notahacker
In fairness, the newish VC needing an apparent success to help raise their
next fund back back-story sounds like a worryingly plausible reason for them
to be able to overlook the fact that Hoopli should never have been allowed
liquidation preferences _in addition_ to a contract guaranteeing they got
their funds back through platform spend.

I'd love to know how often this kind of 'instead of giving you free inventory,
how about we "invest" conditional on you "buying" from us' shell game actually
happens in the Valley though.

~~~
brudgers
I am not saying that it's happening or has happened or will happen, but
Google, Facebook, Yahoo, etc. would certainly be the sort of investors who are
in position to benefit from such an arrangement.

------
cperciva
Seems to me that the problem here is less one of investment terms and
preferences, and more one of _wasting $200M on an unsuccessful advertising
campaign_. If you agree to throw that much money at advertising without having
any guarantee that the advertising will yield (enough) results, you deserve to
walk away with nothing.

~~~
jsonne
Unfortunately you can't guarantee results with advertising. However, you can
mitigate some risks by taking an iterative approach and testing things before
doing a large integrated campaign. You can save a lot of headache by running
some targeted facebook ads to see if they resonate with your audience before
buying up a bunch of tv or radio points.

~~~
alexqgb
The point wasn't whether or not the $200m ad spend was well advised or well
managed. It was included in this scenario as a stand-in for any number of ways
that a company could burn through a lot of cash without achieving a
sustainable, defensible product / market fit, let alone solid traction.

If you're focusing on what the fictional company did with the money, as
opposed to the very real terms under which it acquired the money, you may want
to re-read the piece.

~~~
cperciva
_[the $200m ad spend] was included in this scenario as a stand-in for any
number of ways that a company could burn through a lot of cash_

Right, and my point applies regardless of the way that the company burnt
through $200M: If you burn through that much cash without results, you don't
deserve to walk away from the company with anything.

 _If you 're focusing on what the fictional company did with the money, as
opposed to the very real terms under which it acquired the money, you may want
to re-read the piece._

I read the piece. I disagree with it. I see nothing wrong with the amounts
invested or the preferences, and something very wrong with the fact that $200M
was wasted.

~~~
nostrademons
You don't really disagree with the piece - the author would agree with you
that the $200M was wasted. The point the author was making is that the terms
of Hooli's "investment" basically forced them to waste the money, since the
investment wouldn't have happened had they not spent it on ineffective
advertising using Hooli's own platform. It was that investment that gave Pied
Piper its $1B valuation, hence "valuation isn't everything".

You're probably thinking "I'd never be so dumb as to take an investment with
those terms", and you're right: _you_ wouldn't be. You also don't own a
billion-dollar company. I would bet that somewhere in Silicon Valley, there is
a unicorn whose valuation is based on a deal with similarly bad terms, and it
will blow up in their face in a couple years, and then we'll all marvel at how
stupid someone can be who ran a billion dollar company.

I read the article as a cautionary tale for founders who see "billion-dollar
company" and get stars in their eyes. You are not the target market for it;
you already understand the point it is making (though perhaps not that it is
making that point). There are many other dumbasses in Silicon Valley - I can
see a couple in this comment thread - who do not.

------
brianmcconnell
There's another way to skin this cat. Assume you are not "CEO material", hire
someone who turns out to be a complete fuckup to do it for you because of your
self doubt.

I saw this happen to a company that basically invented the concept of hosted
phone/communication services for business, back in the mid 90s. Their
competitors are worth billions now. The third rate/bully/crook CEO the founder
hired destroyed, literally, billions in opportunity.

(In retrospect the whole company was rotten to the core, so I enjoyed watching
their competitor ring the NYSE bell, but if the founder had taken on the task
of understanding his own business, this outcome would probably have been
avoided).

~~~
InternetUser
Can you at least give a hint as to who either company is?

------
methodover
Hm. As an engineer relatively new to the world of entrepreneurship, I find
myself not really understanding much of the jargon. (Actually, I think I might
understand some - but my confidence in my understanding is low.)

It would be cool if there was like, an annotated version of this explaining
some of the accounting/investing jargon.

For example, this passage:

Richard attracts Peter, a newly-wealthy budding angel investor, who agrees to
put in $1 million as a note with a $5 million cap and a 20% discount.

I think this means that Peter is buying part of Richard's company for 1
million bucks. He's valuing it at 5 million, so that's 20% of the company.
However, there's a discount of 20%... Which is where I get confused. Does this
mean that Peter is paying only 800,000, but getting 20%? Probably not, given
the context. It probably means he gets 24% of the company, right? (He's
getting 1.2M worth of shares for the cost of 1M.)

~~~
sokoloff
You mostly have it.

The $5MM is a cap, not a price. If the Series A is raised at $5MM or more
valuation, then the angel gets his money ($1MM) converted at $4MM ($5MM *
0.8).

If the Series A goes at $4MM, the angel's money is converted at a $3.2MM
valuation (4*0.8)

~~~
carrotleads
The 20% discount confused me too.

Am I right then that the discount is to calculate the equity % based on a
future Series A valuation.

if so in the scenrio's you posted above what is the new Equity % for the
angel.

Looks like it is 20% once it crosses $5m cap as inferred in the article.

~~~
sokoloff
You forced me to look it up (thank you for that).

It seems like _either_ the cap xor the discount applies (investors' option),
so anything over $6.25MM valuation, the cap would apply and anything under
that the discount would apply.

It's too late for me to edit the GP post, so I'll try to correct it here:

At a $5MM priced round, the discount would apply and the investor's note would
convert $1MM at a $4MM valuation (25%). I believe that conversion is done pre-
money, which means the angel is diluted (like all shareholders) from their
initial 25% by the addition of the new money. (None of my angel investments
have [yet] raised a priced round, so I haven't gone through this process,
though I obviously hope to... :) )

If someone else invests $1MM at $5MM pre-money valuation, all prior investors
are diluted by 16.6667%. (Someone who held 10% of $5MM pre-money company will
hold 8.333% of a $6MM company post-money. Either way, their position is worth
$500K.)

So, to know the angel's ownership in the scenario, you need to know how much
dilution happened due to the new money, meaning you need to know not just the
pre-money valuation, but also the amount of new investment money. In any
scenario where the discount applies, the angel's position will be worth $1MM.
In any scenario where the cap is better than the discount, the angel's
position will be worth more than $1MM.

------
hackaflocka
Great article. Would love a simple, colloquial explanation of the following
phrases:

* $1 million as a note with a $5 million cap and a 20% discount.

* senior liquidity preference of 1x to protect their downside since they feel the valuation is rich

* Peter, is stoked that he is getting his $1 million investment converted into roughly 20%

* senior 1x liquidation preference

* the preference overhang of $211 million

* They ask prior investors to recap

* the ‘overhang math’.

* senior preference and a 2x guarantee.

* waterfall spreadsheet

~~~
nirmel
> $1 million as a note with a $5 million cap and a 20% discount.

This refers to an investment done on a "convertible note." These particular
terms mean that the valuation at which their investment will "convert" from
what is nominally a loan into equity will be at most $5m, but if a subsequent
investor invests in an equity financing at less than 6.25m, their investment
will convert to equity at 20% less than the valuation. Read up on convertible
notes for more detail.

> senior liquidity preference of 1x to protect their downside since they feel
> the valuation is rich

Means that in a sale, the investor will get the full amount (1x) of what they
invested before others (i.e. founders, employees) see anything.

> Peter, is stoked that he is getting his $1 million investment converted into
> roughly 20%

Since the valuation was > 6.25m his valuation was capped at $5m, whereas the
investors who are investing got a valuation of $40m "pre-money" or $50m "post-
money" which are much less favorable terms than what Peter invested at.

> the preference overhang of $211 million

Means that if the company is to be acquired, it would take an acquisition
offer of at least $211 million for founders and employees to see even a penny.
That is because that amount was invested with the "1x" preference.

> They ask prior investors to recap

I think this means they are asking previous investors to lower the amount of
liquidity preference they have such that in the event of a sale under $211m
the founders would see some return.

> the ‘overhang math’.

The wiser employees understand the math that says an acquisition has to be
enormous for them to see anything. If they don't think that's likely they will
see little motivation to continue working at the company.

> senior preference and a 2x guarantee.

2x guarantee means that they would be guaranteed twice the amount the invested
in the event of a sale, possibly ahead of other investors, but I'm not sure.

> waterfall spreadsheet

Indicates how much each interested party would get in proceeds in the event of
exits of various amounts. E.g. if company sells for X, investors get Y and
founders get nothing. If company sells for Z, investors get X1 and founder
gets Z. Etc.

~~~
shalinmangar
Can you please explain how did you come up with the figure of 6.25m?

~~~
michaelt
5 million / (1-0.20) = 5 million / 0.8 = 6.25 million

A "convertible note" is a cash investment that "converts" into an equity
investment when the company starts doing equity investments. The have two
separate mechanisms for rewarding investors for getting in early.

The "20% discount" means the investor can convert the note into shares paying
20% less per share than later investors.

The "$5 million cap" means, if the company has a valuation greater than $5
million, the investor can convert the note into a fraction of the company as
if the company was valued at $5 million.

The investor then chooses whichever of these options is better.

Take the example of a $1 million as a note with a $5 million cap and a 20%
discount, when series A funding comes along.

If Series A values the company at $4 million, the investor can choose between
taking shares at a 20% discount (they get shares valued at $1.25 million for
their investment of $1 million) and taking shares at a $5 million valuation
(they get shares valued at $0.8 million for their investment of $1 million)
and they obviously choose the former.

If Series A values the company at $10 million, the 20% discount still lets
them get shares valued at $1.25 million for their investment of $1 million -
but now taking the shares at a $5 million valuation lets them get shares
valued at $2 million for the same investment. Obviously they choose the
latter!

A $6.25 million valuation is the crossover point, where the 20% discount and
the $5 million cap give the investor the same number of shares. At a valuation
below that the discount is the better choice, and at a valuation above it the
cap is the better choice.

------
myth_buster
I was wondering whether the

    
    
      build a waterfall spreadsheet 
    

could be opensourced by this community given that there are lot people here
with varied experiences.

PS: I found this blog quite informative and the meta meta ref amuses me.

~~~
andor436
This isn't bad:
[https://smartasset.com/infographic/startup](https://smartasset.com/infographic/startup)

Although it's not as clear as a spreadsheet would be, I think it's easier to
start with.

~~~
sparkzilla
Thank you for the link. Very informative.

~~~
myth_buster
I second that. I found other interesting information on the site. Thanks for
sharing.

------
kens
The article says that Richard would have personal liability if the sale didn't
go through. That doesn't make sense to me - can someone explain?

Edit: the article says both Richard and the investors would have personal
liability, but isn't a purpose of a corporation to avoid personal liability?

~~~
cperciva
Board members can theoretically face personal liability if they fail to
discharge their fiduciary duty to act in the best interest of the
shareholders.

And in some states I think claims can also be made against directors for
unpaid wages -- I'm not sure how the jurisdictional issues play out for a
Delaware corporation with employees elsewhere though.

~~~
alexqgb
That was exactly the point - the personal liability isn't to the investors,
it's to the state, which tends to take a _very_ dim view of unpaid wages. In
California, I believe treble damages are standard, so missing a $50,000
payroll can cost you $200,000 in addition to court fees and legal costs.

INALB I'm pretty sure this is what the OP was getting at.

------
powera
If you get $240 million in investments, and then sell the company for $250
million, I fail to see how it was successful (or "building a unicorn") at all.

~~~
static_noise
You also take on another dozen millions in additional liability which you have
to pay on top of the 240 million.

It was very successful for "Hooli" who basically channelled back their 200
million after investment and got another 200 million after the sale.

~~~
rsp1984
In even simpler terms, the deal generated 200m in ad sales for "Hooli".

------
walshemj
Why would the CEO Richard be liable for the wages surely that is the company's
liabilities not his personal one

~~~
hglaser
Unpaid wages are one of the few ways to pierce the corporate veil. In the US,
officers of the corporation can be personally liable for unpaid wages.

~~~
walshemj
seems to defeat the purpose of a PLC

~~~
chiph
The US states take unpaid employees very seriously. Think about it from the
employee's point of view - if the company can't make payroll one week, you
might be tempted to let it ride until next week. If they again can't make
payroll, you've put 80+ (120+!) hours into the firm with no payment. I
certainly wouldn't be happy in that situation.

~~~
_delirium
This also partly aligns with it being very easy to fire people in the US. The
government therefore views the employer as having a perfectly reasonable
option in the case where they are truly short of money: fire the employees you
can't afford to pay before they work the hours you don't have money for (or
something halfway, like giving people a non-optional offer to go down to half-
time). In most cases that can even be done with no notice, though that isn't
very nice. But it is at least seen as more honest than stringing people along
ostensibly working for a salary they aren't going to get.

In practice one way to handle this is keep one payroll cycle's worth of liquid
cash "locked up" in an account that is reserved for payroll and which you
don't dip into for other expenses. So even in the worst case the last
paychecks can be sent out before shutting down, if you avoid the temptation to
dip into that account "just this once". That does require having a _little_
bit of a cash cushion, but a VC-funded company should be in a relatively good
position in that regard.

------
sharemywin
Not sure the last deal would have even been up to the CEO. a deal like that
would probably be a board vote, I would think and you may only have 40% of the
vote. also, what if it was the only deal on the table and the trial campaign
preformed well. Btw, Forbes called they heard about the deal and your going to
be on the cover. And let's talk about poor Richard I don't he's managing an
Arby's after he ran a billion dolllar company. Probably some kind of senior
executive somewhere. Curious if VC would take his calls?

------
dataker
Makes me wonder if building a company still is financially wise.

Even if you're successful, a prominent well-established career path will
probably balance out an average startup exit(assuming there's one).

~~~
mellavora
Was it ever financially wise?

~~~
mellavora
I'm not saying not to do it, just saying that there are easier ways to get
wealth. You might be in the game for other reasons.

------
hmate9
An interesting exercise is to think about what would have happened if that
$200 million spent on advertisement on Hooli campaign gave a positive ROI.

Than Richard would be really happy right now.

What Richard should have done, is before accepting that $200 million, spend
some of his own money on Hooli's ad platform to see what it was like, what
kind of return they're looking at. If its good, take the money. If not, walk
away.

But of course, it's very easy to make the right decision after already knowing
the outcome...

~~~
jcoffland
Would Hooli would wait calmly on the sidelines with their offer still on the
table while you did so?

~~~
lmm
If they wouldn't, what does that tell you about them?

------
jcoffland
Great to see a VC being honest about the business. Richard should have never
agreeded to the $200m deal with ad spending strings but I'm sure deals like
this happen all the time. The pressure on an entrepreneur in such situations
must be immense. I imagine others with much more experience giving advice but
with their own motivations in mind. I could easily see founders such as
Richard making decisions in the moment which are obviously bad looking back.

------
AndrewKemendo
So what is the reasonable repeatable way to determine or gauge valuation?

From what we have seen it is "Investor A wants X% of B and is willing to pay Z
for it" therefore value is the multiple of Z that equals 100%. AkA Whatever
someone will pay for it, AkA market prices. Except it's rarely a market in the
traditional sense as it's really ever only a handful of buyers and they value
it based on god knows what metrics.

Seems flimsy and based on whatever the most recent investor thinks - due
diligence best practices aside.

We need a standard way to determine valuation so that founders and investors
alike can point to something that is based in reality and can't be gamed as
easily.

~~~
netcan
Demanding a _standard way to determine valuation_ is in some ways like
demanding a standard way of coming up with ideas. The reason prices are
determined this subjectively is because information is incomplete. That means
you need to use a lot more one off judgements that can't be fit into a
standard.

If information was better then there would already be useful standards. There
are pretty decent standards for companies that demonstrate a lot of
consistency, like shipping companies. There are ways for valuing stock. On the
other end of the spectrum, valuing a company that is still a work in progress
is a different kind of problem. The upside is bigger and the downside more
likely.

~~~
AndrewKemendo
_The reason prices are determined this subjectively is because information is
incomplete._

That is every market ever. No entity makes decisions based on perfect
information - but plenty have a process that is auditable and lays out the
assumptions.

 _If information was better then there would already be useful standards._

I think whatever standard or process we did come up with would be more
refined/accurate with more information - but I that doesn't preclude having
something that can be audited.

I'm not saying that the process would spit out the "right" valuation, because
that is impossible to tell prior to a liquidation event. What I am saying is
that the process for determining valuations needs to be 100% more transparent.
Like it or not there is a process - maybe it's all in one principle's head,
but it's there.

We as founders need to know what that is.

------
rsp1984
All the right things have been said in other comments already, however I'd
like to point out that the outcome for Peter, the angel investor is a little
unclear from the article. It says:

> Peter, while sad about the outcome, has developed a huge syndication
> following on AngelList and has recently benefitted from an early acquisition
> that netted him $3 million on a $250k investment. Can’t win them all, but
> he’s at peace.

Assuming the investment was in convertible notes, surely the debt would have
converted into shares at the same terms that the VC investment happened,
including the liquidation preference. So if the VC gets to take chips off the
table so would Peter, I assume?

------
api
It seems obvious to me that giant valuation means insanely high bar before you
see upside. I am a bit skeptical of the idea that it should be as high as
possible, since if it's fundamentally ridiculous and there's no way you will
ever live up to it I fail to see how this is in anyone's interest.

------
bshanks
Hypothetically, assume a company whose valuation increases roughly
geometrically at first, but then levels off at an asymptote, and assume that
during the geometric phase the valuation fluctuates by 50% around its trend.
Assume that no one knows where the asymptote is. Periodically, there are
funding events, during which the company sells stock at a 1x liquidation
preference; assume it sells enough stock so that at each funding event, the
sum of the liquidation preferences is greater than 50% of its valuation.
Consider a funding event that occurs when the valuation happens to be 25%
above trend; therefore the liquidation preferences will be greater than 0.625
of the on-trend valuation, and then the next time that the valuation falls to
50% below trend, the sum of those preferences will be greater than the
company's current valuation. At this point, many of those with liquidation
preferences (some of whom may have a short time horizon; or may be risk-
averse; or may believe that the current valuation will not rise very much in
the future) may strongly prefer selling or liquidating the company
immediately, which is at odds with common-stock-holders, who would get nothing
in such a liquidation and who would prefer to keep going.

Note that in this model, this result occurred not because of mismanagement,
but due to the natural and expected fluctuation in market prices, combined
with unavoidable uncertainty about which price changes are fluctuations and
which are simply 'the new normal', combined with the sum of liquidation
preferences being comparable in magnitude to the fluctuations in prices,
combined with the bad luck of a funding event happening to occur when the
valuation was above trend.

Is this model reasonable? If so, how should management of such a company
approach fundraising? It seems to me that fluctuations are inevitable and that
the only thing management could control is how much money they raise at once;
if fluctuations are 50% around trend, then management needs to keep the amount
of money raised small enough so as to keep the sum of liqudiation preferences
well under 1/3 of the current valuation (because in that case even if the
valuation falls from 50% over trend to 50% under trend, the valuation will
still be strictly greater than the sum of liquidation preferences). More
realistically, the size of fluctuations would not be known in advance to be
50% but must be estimated. In the article, the valuation fluctuated from $1bil
to $250mil, so the fluctuation parameter would be at least (1-x)/(1+x) =
250/1000 = 4 -> x = 3/5 = 60%, and the sum of liquidation prefs "should have"
been kept well less than 250/1000 = 1/4 of the current valuation.

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DonGateley
Is there a good text which would make the meaning of all this clear?

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nphyte
It's good to know that the she watched the episode. Has anyone in the valley
gone through this or?

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jim_greco
Talking your book much? This story is so contrived that it hinges on a
comically inept founder taking $200M to solely spend on an advertising
campaign on the platform of the person investing it. If this is the best
example a VC can offer to cram down valuations then I'm pretty sure founders
are going to keep reaching toward those unicorn valuations.

~~~
x0x0
ever heard of living social? How much of amazon's investment was recycled into
purchases (obviously with lower margins than ads) on amazon when they offered
a $20 amazon gift card for $10?

