Unicorn Valuations aren’t the Same as Public Market Valuations

Fenwick & West, one of the top law firms for high growth tech companies, has a great new post up titled The Terms Behind the Unicorn Valuations. With so many tech startups raising money at valuations of a billion or more, it’s clear we’re in boom times, but it’s also clear that many people don’t understand that the valuations of these unicorns aren’t the same as the valuations we see in publicly traded companies. Why? The investors in these companies get special preferred stock that has a number of additional protections, and in exchange, they invest at a higher valuation. Put another way, if the stock was common, like is normally associated with a publicly traded company, the valuations would be significantly lower.

Here are a couple terms that make the preferred stock more valuable than common stock, according to the survey:

  • Acquisition Protection Terms – If the company is sold at a value lower than the investment valuation, the investors get all their money back, even if their percent ownership represents a smaller amount of money (e.g. if an investor puts in $100M at a $1B valuation and owns 10%, then the company is sold for $500M, instead of getting $50M in the sale, the investor gets their $100M back, even though that’s 20% of the sale).
  • Future Financing Protection Terms – If the company raises money at a lower valuation in the future, the existing investors get an increased ownership position in the company that represents the previous investment amount relative to the new valuation (e.g. if the company raised $100M at a $1B valuation, that’s 10%, but then if they went out and raised another $50M at a $500M valuation later, the investors that put in the $100M in the previous round would now have 20% of the company instead of 10%, and the non-investors like the entrepreneurs and employees would be diluted).

For a great story that shows how deal terms matter more than valuation, read Heidi Roizen’s How to Build a Unicorn from Scratch – and Walk Away with Nothing. Due to these specials terms, and others, the valuations for unicorns aren’t the same as public market valuations as the investors get a number of protections that aren’t normal.

What else? What are some other terms tech startup investors often get that make the valuations between private and public companies difficult to compare?

3 thoughts on “Unicorn Valuations aren’t the Same as Public Market Valuations

  1. “If an investor puts in $100M at a $1B valuation and owns 10%, then the company is sold for $500M, instead of getting $50M in the sale, the investor gets their $100M back, even though that’s 20% of the sale).

    Just to check the math. In this example, if new investors account for 50% ownership of the company, and it’s later sold for half-price, then those new investors receive all their money back and everybody else gets nothing.

  2. Well, then the real question is if the terms are such in real, why are seasoned entrepreneurs, instead of protecting the shares of themselves and their employees, cashing in on the boom?
    Because clearly they are going to miss out on a lot of money if the things go out of turn.

  3. David, thanks for this important blog post. So often terms are given short shrift compared to valuation. Most everything that ultimately is important comes to down to terms and structure of a venture financing, except of course if the company is a runaway success, goes public, preference go away and everybody lives happily ever after.

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