Protections for Late Investors Can Inflate Startup Valuations
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Re: Protections for Late Investors Can Inflate Startup Valuations
#2a lot of this sounds like three comma club problems, however, I'm' trying to connect the dots between the discounts offered to late stage investors and how that affects my one comma club friends and family ..help?
Re: Protections for Late Investors Can Inflate Startup Valuations
#3Suppose an investor pays $100M at a valuation of $1B with a 1x liquidation preference.
Then the REAL valuation of the business is not $1B. It's whatever the investor would have paid for COMMON shares.
Re: Protections for Late Investors Can Inflate Startup Valuations
#4[deleted]
Re: Protections for Late Investors Can Inflate Startup Valuations
#5a lot of this sounds like three comma club problems, however, I'm' trying to connect the dots between the discounts offered to late stage investors and how that affects my one comma club friends and family ..help?
When a late-stage investor gets to invest with a liquidation preference, that can ruin the value of the common shareholders (i.e., early employees) if the startup is not eventually sold for an even bigger valuation.
I.e., the early employees do a great job. The business has a value of $100M and their non-liquid shares are worth $0.5M. The business raises $100M with a 1x liquidation preference. The startup fails, and eventually sells for $50M. Instead of getting $0.1M-$0.25M, those early employees get nothing.
Re: Protections for Late Investors Can Inflate Startup Valuations
#6tl;dr Startup valuations are usually calculated by multiplying the number of issued shares by the price paid at the last round. This can overestimate the valuation if there are different classes of shares, and the most recent shares have more rights (e.g. liquidation preferences or discounts on future rounds) than do those issued earlier.
Re: Protections for Late Investors Can Inflate Startup Valuations
#7The article mentions that companies could increase their valuations by increasing the number of shares in the option pool. But how would that work? I'm not seeing the math on that.
Re: Protections for Late Investors Can Inflate Startup Valuations
#8tl;dr Startup valuations are usually calculated by multiplying the number of issued shares by the price paid at the last round. This can overestimate the valuation if there are different classes of shares, and the most recent shares have more rights (e.g. liquidation preferences or discounts on future rounds) than do those issued earlier.
I don't know the answer, but doesn't that have to come out in the valuation employees are given? Since there are huge tax penalties both to the employer and the employee for giving in-the-money options, you (in theory) must be given options with a strike set by a 409a evaluation. I think it's best practice to have an arms-length evaluation, since if your cfo sets it and the irs disagrees, see tax penalties. Is this not the state of the world?
Re: Protections for Late Investors Can Inflate Startup Valuations
#9a lot of this sounds like three comma club problems, however, I'm' trying to connect the dots between the discounts offered to late stage investors and how that affects my one comma club friends and family ..help?
When a late-stage investor gets to invest with a liquidation preference, that can ruin the value of the common shareholders (i.e., early employees) if the startup is not eventually sold for an even bigger valuation. I.e., the early employees do a great job. The business has a value of $100M and their non-liquid shares are worth $0.5M. The business raises $100M with a 1x liquidation preference. The startup fails, and…
but aren't the unicorns headed for ipo? ..in that case seems anyone with stock options probably does well if the stock doesnt completely tank ?
Re: Protections for Late Investors Can Inflate Startup Valuations
#10Earlier quoted context omitted.
When a late-stage investor gets to invest with a liquidation preference, that can ruin the value of the common shareholders (i.e., early employees) if the startup is not eventually sold for an even bigger valuation. I.e., the early employees do a great job. The business has a value of $100M and their non-liquid shares are worth $0.5M. The business raises $100M with a 1x liquidation preference. The startup fails, and…
but aren't the unicorns headed for ipo? ..in that case seems anyone with stock options probably does well if the stock doesnt completely tank ?
lotsa folks don't think that many unicorns will actually IPO - here's a good read that summarizes the potential issues: http://abovethecrowd.com/2015/02/25/investors-beware/