Can anyone explain why $1B is being invested at a $70B valuation, while existing share holdings are being purchased at a lower/to be determined valuation?
The $1B that is being invested at the $70B valuation is direct from the company and Softbank will be purchasing preferred shares like any other VC. These preferred shares have extra rights, things like liquidation preference, board seats, voting rights, etc.
What specifically they will receive is unknown, but at the very least they will have a 1x liquidation preference on that $1B invested, which means if the company sells for the total amount of money raised (well below $70B), the investors get all of their money back.
So think of preferred shares like "insured" shares, which is why investors are willing to pay more, because the likelihood of entirely losing their investment is lowered significantly.
However, Uber may not want to raise more capital, take on extra dilution, etc, so they are selling only $1B that will flow to their balance sheet.
The other $9B will be purchased from common shares, or employee shares. These shares do not have these preferred rights and most significant they do not carry a liquidation preference. Which means if the company sells for the amount raised, or below that, you lose the entire $9B.
Since there is no downside protection and there is no liquid market, this is usually used to negotiate a lower price than that of preferred shares.
If there had been considerable time between when the last priced round happened and when secondary shares are purchased then the investor may have to buy them above the last round price because the company has made significant traction and the perceived value of the company is now higher.
But since the last two priced rounds are at the $70B mark and these shares are unsecured, they will usually be bought at a discount.
How much varies but you can expect a 10-30% lower price.
However, since this is sponsored by the company early employees will most likely be allowed to sell shares at a very large valuation compared to what their strike price is.
Preference terms explain some, but a minority, of the pricing gap. It’s mostly so existing investors can keep marking their holdings at $70bn [1]. (It also maximises Uber’s cash extraction from Softbank so the latter doesn’t go and hand that money to Uber’s competitors.)
Thanks for the detailed explanation. I am wondering if its ever possible to board to later approve that those newly bought "common" stocks get converted to "preferred" i.e., have the same liquidation preference?
It is of course possible and just requires a board vote, but since the company doesn't receive the funds and have them, it wouldn't be a good idea.
So it's possible of course, but isn't done 99.99999% of the time.
Now if they were purchasing $1B in preferred and another $100MM in secondary maybe, but certainly not when the common shares amount is $9B would put the other existing investors in jeopardy for their own preferred shares providing their invested capital back should things go south.
No sane board would ever convert common to preferred because a venture-backed Board represents the preferred shareholders. Before an IPO the preferred converts to common, but not the other way.
In many ways nostromo95 is correct, however that $1B is probably sitting at the top of the liquidation preference stack. The rest of the money would probably be buying earlier preferred stock or common shares which would be riskier especially if the company can't maintain the $70B valuation.
As a side note, if you were to try and double $100B, I think Softbank's approach is pretty good. You'd aim to invest large amounts of capital into late stage companies and negotiate to be the most senior liquidation preference. This strategy would give you growth potential as well as plenty of downside protection. One downside is that companies that take Softbank's money may struggle to raise additional private rounds. As a result, I think Softbank will be the last round of private capital that many of these companies will raise before IPO or some kind of M&A.
