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Squaring Venture Capital Valuations with Reality

papers.ssrn.com

21–30 of 48 posts

Re: Squaring Venture Capital Valuations with Reality

#21
post #17
post #13

Earlier quoted context omitted.

Existing 409A valuations already take all of that into account. When an employee is issued options, the one thing he can be reasonably sure of is that they are not in the money. Options have to be issued at or above the FMV for common stock, or it is taxable compensation to the employee. Note the "at or above" language. An employee's option has to be out of the money the day it is issued, but that could be by .01 or…

Correct me if I'm wrong but the relevant 409A valuation is the most recent one done when you exercise your options and taxes on them become due. I think that's the situation GP was referring to, that this approach might help fix. Unless you're saying that when Square's valuation suggested a share price of ~$15, a 409A done at the same time would have returned a value closer to the ~$5 that the paper suggests is more…

You're not wrong, but this isn't just about taxes. In the case of Square, apparently they got a 409a valuation done that set a FMV for common of $9.11 and then issued options with that strike price as is standard practice.

Anybody who exercised immediately at $9.11 probably wasn't subject to any tax liability (assuming appropriate 83b election). Employees exercising at that price may have fooled themselves into thinking they were already $6/share in profit-land, which would be incorrect and is the point of the article.

But the bigger problem to me is that employees were fooled into paying $9.11 for something that was actually worth far less.

Re: Squaring Venture Capital Valuations with Reality

#22
post #4

And the other other half are undervalued then.

That would be true if 1 + 1 = 2 but stock pricing changes by the minute/day/good news/scandal/hiring/firing, etc. Some of their valuations may have been on the money for the minute that it was determined but so many factors come into play even a huge over-valuation could even out next week based on a great quarterly report or a contract signed or if the right CEO is hired on an otherwise adrift ship.

Re: Squaring Venture Capital Valuations with Reality

#23
post #6
post #4

And the other other half are undervalued then.

It's not a zero sum game. Company valuations are independent.

But can't you be only either undervalued or overvalued? There is a knife's edge at properly valued but seems like almost all companies are one or the other.

Re: Squaring Venture Capital Valuations with Reality

#25
post #4

And the other other half are undervalued then.

You could at least read the paper abstract instead of relying on the made up HN title...

The actual claim is "almost one half (53 out of 116) lose their unicorn status when their valuation is recalculated". So, yes, if half lose unicorn status, then the other half do not lose their unicorn status. Is that really such a keen insight?

Re: Squaring Venture Capital Valuations with Reality

#27

Of equal interest is author's other paper entitled "How Do Venture Capitalist's Make Decisions?" And after 900+ interviews it's neither jockey nor horse nor any other correlation, but spray and pray all around. Am currently negotiating a small ($10k) angel investment in an ecommerce startup in Indonesia. All "go" signals are there: ambitious team, growing market, outside foreign investment, etc. But as far as calcula…

50% seems like pretty optimistic odds for an angel investment.

Re: Squaring Venture Capital Valuations with Reality

#28

Of equal interest is author's other paper entitled "How Do Venture Capitalist's Make Decisions?" And after 900+ interviews it's neither jockey nor horse nor any other correlation, but spray and pray all around. Am currently negotiating a small ($10k) angel investment in an ecommerce startup in Indonesia. All "go" signals are there: ambitious team, growing market, outside foreign investment, etc. But as far as calcula…

50% seems like pretty optimistic odds for an angel investment.

in general, but with just a $10k angel, the odds of becoming a $100k company are pretty decent.

Re: Squaring Venture Capital Valuations with Reality

#29
I was always confused by this response:

> pg: "Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that. I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly." https://news.ycombinator.com/item?id=6896833

Of course it only matters if things go badly..

Re: Squaring Venture Capital Valuations with Reality

#30
post #4

And the other other half are undervalued then.

> And the other other half are undervalued then.

You must be responding to the current HN title and not anything from the actual paper? This comment doesn't make any sense otherwise.

The paper literally has an entire section titled "All unicorns are overvalued" (section 4.2) and figure 3 shows the distribution of overvaluations given their methodology.

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