5 ms·

One thing I read that isn't often mentioned is how liquidation preference for late rounds can drive a lot of these insane valuations. For example, let's say yo

by mrmcd 11y ago

One thing I read that isn't often mentioned is how liquidation preference for late rounds can drive a lot of these insane valuations. For example, let's say you raise $250MM in a series E at a 10B post money. As a company/founder, this makes you look awesome on paper and super valuable as a company. Meanwhile, the series E investors usually have the top priority for liquidation, meaning the risk is actually pretty small, since the sale/IPO value would have to go below 250MM before you lose money. The real people getting screwed by these paper unicorns though are the late stage employees being sold options as compensation.

aptimpropriety 11y ago
But Fidelity isn't writing down the value of the company, it's writing down the value of its shares. Do you have any guesses as to what this means, given they are probably the most senior equityholders on this investment? My suspicion (from experience in the mutual fund industry) is that this is tax accounting related. Overly simplistic explanation: Mutual funds typically distribute short term capital gains at year-end, which is taxed as ordinary income (~40%), not capital gains (~15%). Managers of funds that hold private securities actually have the choice to 'mark down' the prices of their securities in any given month. Think of it like valuing a house - if you want to value your total net worth, you can mark your price as what you want, to an extent (see Trump). Managers often use this flexibility to 'bury' losses in down times, or for tax advantages. Finally, can't agree enough about who loses in these cases. Employees who vastly over-value options are the folks who lose in this case. Investments made by institutional folks like Fidelity are too small to even register as a blip to their overall funds, and those funds are diversified and managed to handle downturns in sectors like this.
- the_watcher 11y ago
  The tax implications are interesting, haven't heard it brought up before.
  - maxerickson 11y ago
    These funds have 10s of billions of dollars of investments, a few tens of millions here or there does not have significant tax implications. Here's one of the Fidelity funds invested in Snapchat: https://fundresearch.fidelity.com/mutual-funds/composition/316200104 https://fundresearch.fidelity.com/mutual-funds/composition/3... It's got $40 billion under management. There's a document findable from there that lists their Snapchat investment as $10 million (Prospectus and Reports->Monthly Holdings report). The number 1 holding of that fund is $2,192,901,654 of Apple. So they get roughly $10 million each time Apple pays a quarterly dividend.
    - Stasis5001 11y ago
      That's not exactly fair. They hold many assets, so of course any action on any individual asset may not have a significant effect. However, if they behave similarly across all similar assets, it will have an effect on the overall fund.
      - maxerickson 11y ago
        I think the percent of holdings argument is going to apply to these funds at Fidelity even if you take all the startups they own together. I guess "tens of millions" becomes excessively dismissive though.
        Stasis5001 11y ago
        Sure but even still, suppose an analyst saves all of Fidelity's clients 1M in two days worth of work. We can't dismiss that as silly because that savings is so small compared to 5 trillion AUM, right?
        maxerickson 11y ago
        I think it wouldn't be Hacker News. I'd also like someone who understands the issue well to let us know whether these mark downs have any tax implications to begin with. I think it might sometimes be the case that marking down such a holding would allow recognition of a tax loss but I don't think that is going on here.
dubroff 11y ago
What do you mean by this "The real people getting screwed by these paper unicorns though are the late stage employees being sold options as compensation"? I'm currently a student job searching and this seems pretty relevant.
- balls187 11y ago
  Employees and Investors of private companies hold different class(es) of stock. Employees (and Founders) have common stock, while Investors get preferred stock. Preferred stock carries with it a "liquidation preference", which basically means holders of that stock get paid out first during a liquidity event, including some multiple of their original investment. What ever is left, is divided among the holders of common stock. If the company is publicly traded, then all owners of stock hold the same class of stock (common).
- aidenn0 11y ago
  You get options offered at a strike price that (for tax reasons) usually matches the market value of the company. If the company is way overvalued on paper, that makes the options essentially worthless, as the strike price is higher than what you could trade the shares for.

by mrmcd 11y ago

aptimpropriety 11y ago

But Fidelity isn't writing down the value of the company, it's writing down the value of its shares. Do you have any guesses as to what this means, given they are probably the most senior equityholders on this investment? My suspicion (from experience in the mutual fund industry) is that this is tax accounting related. Overly simplistic explanation: Mutual funds typically distribute short term capital gains at year-end, which is taxed as ordinary income (~40%), not capital gains (~15%). Managers of funds that hold private securities actually have the choice to 'mark down' the prices of their securities in any given month. Think of it like valuing a house - if you want to value your total net worth, you can mark your price as what you want, to an extent (see Trump). Managers often use this flexibility to 'bury' losses in down times, or for tax advantages. Finally, can't agree enough about who loses in these cases. Employees who vastly over-value options are the folks who lose in this case. Investments made by institutional folks like Fidelity are too small to even register as a blip to their overall funds, and those funds are diversified and managed to handle downturns in sectors like this.

the_watcher 11y ago
The tax implications are interesting, haven't heard it brought up before.
- maxerickson 11y ago
  These funds have 10s of billions of dollars of investments, a few tens of millions here or there does not have significant tax implications. Here's one of the Fidelity funds invested in Snapchat: https://fundresearch.fidelity.com/mutual-funds/composition/316200104 https://fundresearch.fidelity.com/mutual-funds/composition/3... It's got $40 billion under management. There's a document findable from there that lists their Snapchat investment as $10 million (Prospectus and Reports->Monthly Holdings report). The number 1 holding of that fund is $2,192,901,654 of Apple. So they get roughly $10 million each time Apple pays a quarterly dividend.
  - Stasis5001 11y ago
    That's not exactly fair. They hold many assets, so of course any action on any individual asset may not have a significant effect. However, if they behave similarly across all similar assets, it will have an effect on the overall fund.
    - maxerickson 11y ago
      I think the percent of holdings argument is going to apply to these funds at Fidelity even if you take all the startups they own together. I guess "tens of millions" becomes excessively dismissive though.
      - Stasis5001 11y ago
        Sure but even still, suppose an analyst saves all of Fidelity's clients 1M in two days worth of work. We can't dismiss that as silly because that savings is so small compared to 5 trillion AUM, right?
        maxerickson 11y ago
        I think it wouldn't be Hacker News. I'd also like someone who understands the issue well to let us know whether these mark downs have any tax implications to begin with. I think it might sometimes be the case that marking down such a holding would allow recognition of a tax loss but I don't think that is going on here.

dubroff 11y ago

What do you mean by this "The real people getting screwed by these paper unicorns though are the late stage employees being sold options as compensation"? I'm currently a student job searching and this seems pretty relevant.

balls187 11y ago
Employees and Investors of private companies hold different class(es) of stock. Employees (and Founders) have common stock, while Investors get preferred stock. Preferred stock carries with it a "liquidation preference", which basically means holders of that stock get paid out first during a liquidity event, including some multiple of their original investment. What ever is left, is divided among the holders of common stock. If the company is publicly traded, then all owners of stock hold the same class of stock (common).
aidenn0 11y ago
You get options offered at a strike price that (for tax reasons) usually matches the market value of the company. If the company is way overvalued on paper, that makes the options essentially worthless, as the strike price is higher than what you could trade the shares for.