Moreover, most of the institutions doing these late stage rounds and secondaries are the same banks and asset management firms that float the IPOs.
One of the unintended consequences from SOX is the creation of this public-private funding environment where huge private firms and high net worth individuals can invest, but small retail investors are shut out until the venture firms believe the company's value has plateaued (Slide 30). We saw this happen with Facebook, for which there is a ton of second market valuation data from 2007 through the IPO to the present. If you believe that small retail investors should be protected from themselves when it comes to early stage investing, this is a good thing.
It's substantial. If VCs get a 1x liquidation preference, then it's (effectively) a no-downside investment since Uber is worth (worst-case) $500M+. If they get >1x and are the last investor (most-preferred), then they are virtually guaranteed solid return. Late stage VCs know what they're doing and valuation is still only half the equation.
As for private firms and high net worth individuals.... that's an entirely different issue; I'm certainly not a fan of accredited investor regulation. I'm also not a huge fan of my retirement (401k funds) being invested into the startup ecosystem without any say in the matter either.
And which secondary markets are those?
Alternately, the small retail investor isn't getting the chance to make life changing amounts of money by putting 1k into Microsoft or Amazon.
I suspect I (and lots of other people) would have been willing to invest in Facebook when it was a 1 billion company. That would be a 270x return from now. If you bought at IPO you'd be a little more than 2x now. Alternately, if you bought at the absolute bottom it's ever been you'd be at 4x.
Certainly 2x and 4x are nice, but they don't make you wealthy in the way 270x does.
Why is that?
[Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]
Let's say a VC invests $500M into Uber at a $50B valuation (1% equity). If Uber gets acquired for sub-$50B, then the VC gets their $500M back despite their ownership percentage. As an example, if Uber were acquired for $25B, then the VC would get their $500M back rather than the equity value of their shares (1% of $25B => $250M). And if they had 2x liquidation preference, they'd earn $1B on a $25B liquidation.
This downside protection (sale of company for less than valuation at fundraise) is a key term on all priced rounds for this very reason. That's why these terms matter so much.
No, that's wrong. The investor loses nothing until the value declines to $500 million and then suffers linear losses afterward (i.e. if value is $100M then they lose $500-100=$400M).