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ya but if you raise an extra 100M, that most likely is an up-round, which means the value of employee's equity has increased

example: as an employee you own 10% of the company. The 10% is worth $10. After company raises a 100M round and dilution has occurred, you own 1% of the company, but that 1% is now worth $50

who is being treated unfairly? I don't quite understand




The problem arises when the company exits at below the ridiculous valuation, inflated by the up rounds.

Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit. This means that while the employee private equity may increase in value, the employees get pennies on the dollar during the exit because the majority of the payout goes to the investors who inflated the price to begin with.

It gets worse when employees pay taxes on the equity at the inflated valuation, but there are ways claw that back later.


> The problem arises when the company exits at below the ridiculous valuation, inflated by the up rounds.

But you don't have the counterfactual to know what the company would have exited for without the ridiculous valuation. Probably a lower number.


An exit is an exit. Failed companies getting acquired is still an exit, whether it happened early without funding or later with a ridiculous valuation.

The difference is the expected value of income that the employees are given in equity, which is especially nefarious.


Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit.

This is not a thing that happens in the vast majority of circumstances. Preferences are for downside protection not a way for investors to actually make money. No one invests with the goal of making use of them.


The "vast majority of circumstances" are not investment rounds propping up a unicorn.

Investors who play in this arena are not stupid: https://angel.co/blog/liquidation-preference-your-equity-cou...


Good Technology had $556 million in funding:

https://www.crunchbase.com/organization/good-technology

Per your link, they sold for $425 million.

The investors lost money.

That is not the outcome they were hoping for. However, their preferences did provide them downside protection which was, as I noted, their purpose.


Per both links:

1) Good Technology was valued at $1.1 Billion.

2) The investors lost money, but the employees lost much more.

-> This is the problem with unicorns.

You've completely missed the point.


#2 is not at all clear. Investors lost (collectively) over 125 million dollars. The only employess that lost money are those that exercised stock options and had to pay taxes on unrealized gains. It's highly doubtful that this totaled nearly as much as the investors lost.


The value of the company has increased either way, the fact a round happens doesn't change the underlying value but merely signals it. Since employees generally can't sell their shares either way that signaling doesn't impact them. So, in your example, before the round you actually owned $500 and after the round you own $50.


No. I see what you mean, but in practice that's not what happens.

Numeric value is determined at time of sale. Without a sale, the object has no "value". It might be useful to you in some way, but it's value is 0 unless you can sell it. There is no such thing as "underlying value"

example: I have a normal orange that I bought for $5 at the supermarket. The orange's underlying value is $5. If I sell it to my friend for $10, the value of the orange is now $10. If no one is willing to buy it, its value is $0.

The same thing happens when you raise a new round. When you raise a new round, you've made a "sale": someone paid money for it. That exchange of money/shares is what determines value.


While I agree that selling something at the highest price you can is the best way to appraise value, I disagree that an up round necessarily increases the equity value of employees (unless the employees can sell off their equity during the round).

To use your orange metaphor, while it is true that if no one else wants the orange the value of the orange is $0, I don't have to sell it to have a good idea of what the price of an orange is. For example, if there are people offering to buy my orange for $8 and I know that a typical bid-ask spread for fruits is %50 of the bid and most transactions occur at midpoint I can be relatively certain that the orange is worth $10 despite no transaction occurring and there being no market for oranges (if there is a generic orange market you have access to then the entire point becomes moot since you can just take the market price).


yes, but the key part of your statement is "if there are people offering to buy". Everything else about spread/bid/ask/etc is just mathematic sugar.

"People offering to buy" is key.

It's very easy for a founder to tell employees "hey I met with a VC yesterday, and they were interested in investing at $x a share!". It's easy to say that, but making it actually happen is the real deal. When someone sign on the dotted line and hand over real $. It's a much more accurate test of value.


> So, in your example, before the round you actually owned $500 and after the round you own $50.

That's not how the math works. In the prior round people didn't know the value of the company. Maybe it was worth $100M, maybe it was worth zero. The expected value (weighted average probability of all scenarios) of your stake in the company was worth $10 per the parent




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