4 ms·

These valuations are driven by huge liquidation preferences which will totally wipe out common stockholders in any down round or distressed sale.

by fipple 8y ago

deleted 8y ago
[deleted]
tptacek 8y ago
Wait, explain the connection between liquidation preferences and valuation? Or is the argument that these companies get very high nominal valuations but the terms on the rounds they raise include punitive preferences?
- WisNorCan 8y ago
  Liquidation multiples and preference gives the investor protection when things go bad (and also a kicker when it goes well). Let’s say you put in $100M and have a 2x liquidation multiple at a $4B valuation. Even if the company falls apart and sells for $100M you still get your money back. If it declines to $200M you get all of that before anyone else. In reality terms vary substantially. In this case, Doordash had just raised and didn’t need to raise again. Depending on how desperate investors were to get in, they might have gotten clean terms.
  - tptacek 8y ago
    No, I get what a preference is; I'm wondering what the connection between them and valuation is.
    - WisNorCan 8y ago
      Higher multiples and preference means that you have less downside and higher upside in the investment -> higher valuation.
    - vecter 8y ago
      I think he's saying that the valuation would be lower if the liquidation preference were lower. This makes sense since a higher liquidation preference reduces the risk of the investment, thus allowing you to grant a higher valuation.
      - mbesto 8y ago
        Exactly. This basically makes later stage investments risk-free (nothing is risk free, but you get my point) while pushing all of the risk to the founders and employees.
    - bkohlmann 8y ago
      Founders may trade a higher valuations for investor preferences. A Stanford professor of mine who studies VC noted that preferences a few years ago were most prevalent when just pushing startups into unicorn terriory.
      - naveen99 8y ago
        Is there a similar interplay between valuation and friendliness to secondary markets for employee shares.
        williamscales 8y ago
        I expect you would see that the value of shares where the stock purchase agreement says the company has the right to block the sale would be lower
    - aslkdjaslkdj1 8y ago
      The press derived a valuation using valuation = price paid X 100/percent equity Those liquidation preferences mean that investors will pay more for their equity % than they would have without them which inflates the valuation estimates used by the above formula. The basic idea is that not all % equity is the worth the same amount, but it is assumed to when a valuation number is reported.
    - dasil003 8y ago
      You're being unusually oblique. It's conventional wisdom that liquidation preference multiples are tied to higher valuation, but you already knew that. Do you disagree with this or have some more interesting theory regarding liquidation preference?
    - ghazak 8y ago
      My assumption is that you sell a given stock with 1x liquidation preference, and the price of that stock is used to determine the valuation for the company, pretending the price is the same for the common stock as the stock with 1x liquidation?
- rahimnathwani 8y ago
  Yes, that's the usual case (but not in this case apparently). If a company has 5 classes of shares (common, A, B, C, D), then it's reasonable to value the company's equity by estimating the value of 1 share of each class, multiplying by the number of shares issued, and summing up these products. The more common method used by PR folks and journalists is: [Price at which class D shares were last bought] * [Total number of outstanding common, A, B, C and D shares] This is incorrect if the rights attached to the different classes are different enough that the values of the shares are different. And that's the usual case.
- charleslmunger 8y ago
  Investors are willing to pay higher prices for less equity for two reasons: 1. Normal investment of $Y at valuation X implies that you, the investor, think that the company is worth more than X. If it exits for more, you'll get more, less you'll get less. But investing $Y at valuation X with a 2x liquidation preference means that you think the company is worth merely Y. The valuation basically doesn't matter any more. If I invest $10 at a $100 valuation and the company exits at a $500 valuation, I get a $40 profit. If it exits at a $50 valuation, I've lost $5. The valuation I invest at makes a big difference for my profitability. But consider the same scenario with a 2x liquidation preference - in the happy case, I get the same profit. In the sad case, I've still doubled my money. 2. Investors in startups are not perfectly rational investors. If I own an existing stake in a company, I would fight tooth and nail to prevent any new money coming in from having a liquidation preference over me. But in truth, if the company can raise money at a $2 billion valuation normally, or a $4 billion valuation with a preference, a fund can report double the gains to the people who actually put money in it. So they stay quiet, show off the impressive paper returns of their current investment fund, and go on raising the next one. This effect is doubly pernicious when the later investors are also earlier investors - they can basically juice their own balance sheet. On paper, the existing stake is worth more because of the inflated valuation, and the new stake is a heads-I-win-tails-you-lose. And at the lowest preference are all the employees. Founders take money off the table in the inflated new rounds, so while they technically have a lower preference they've still cashed out significantly.
  - deleted 8y ago
    [deleted]
askafriend 8y ago
They have a 1x liquidation preference from what I was told when I was given an offer somewhat recently. So 1x is standard, and nothing crazy like what you're implying.
stanleytang 8y ago
Nope. We raised on clean terms, 1x liquidation preference, no ratchets. Has been true for every single round —- we have and will never take dirty terms, even if it means a lower valuation
- fipple 8y ago
  Huh, cool to know. Congratulations and sorry for assuming.
  - SmellyGeekBoy 8y ago
    Just a hint for next time, if that's the case then perhaps you should start your comment with "I assume..." instead of stating it as fact.
davidmr 8y ago
Given that Stanley just said precisely the opposite, I'm wondering why you made this comment. I'm not being a jerk, but I wonder why you spoke so authoritatively. Do you think that he's lying, or were you just speaking in generalities?
- colinhmit 8y ago
  Its a decent assumption at this stage in the VC cycle, especially when an established player (doordash v postmates) has a surprising multiple - Uber is a great example: https://www.bloomberg.com/view/articles/2017-11-16/softbank-thinks-some-uber-shares-are-worth-more-than-others https://www.bloomberg.com/view/articles/2017-11-16/softbank-...
- deleted 8y ago
  [deleted]
scarejunba 8y ago
You're just making up stuff. Why?
draw_down 8y ago
Clean terms are possible, believe it.

These valuations are driven by huge liquidation preferences which will totally wipe out common stockholders in any down round or distressed sale.

by fipple 8y ago

These valuations are driven by huge liquidation preferences which will totally wipe out common stockholders in any down round or distressed sale.

deleted 8y ago

[deleted]

tptacek 8y ago

Wait, explain the connection between liquidation preferences and valuation? Or is the argument that these companies get very high nominal valuations but the terms on the rounds they raise include punitive preferences?

WisNorCan 8y ago
Liquidation multiples and preference gives the investor protection when things go bad (and also a kicker when it goes well). Let’s say you put in $100M and have a 2x liquidation multiple at a $4B valuation. Even if the company falls apart and sells for $100M you still get your money back. If it declines to $200M you get all of that before anyone else. In reality terms vary substantially. In this case, Doordash had just raised and didn’t need to raise again. Depending on how desperate investors were to get in, they might have gotten clean terms.
- tptacek 8y ago
  No, I get what a preference is; I'm wondering what the connection between them and valuation is.
  - WisNorCan 8y ago
    Higher multiples and preference means that you have less downside and higher upside in the investment -> higher valuation.
  - vecter 8y ago
    I think he's saying that the valuation would be lower if the liquidation preference were lower. This makes sense since a higher liquidation preference reduces the risk of the investment, thus allowing you to grant a higher valuation.
    - mbesto 8y ago
      Exactly. This basically makes later stage investments risk-free (nothing is risk free, but you get my point) while pushing all of the risk to the founders and employees.
  - bkohlmann 8y ago
    Founders may trade a higher valuations for investor preferences. A Stanford professor of mine who studies VC noted that preferences a few years ago were most prevalent when just pushing startups into unicorn terriory.
    - naveen99 8y ago
      Is there a similar interplay between valuation and friendliness to secondary markets for employee shares.
      - williamscales 8y ago
        I expect you would see that the value of shares where the stock purchase agreement says the company has the right to block the sale would be lower
  - aslkdjaslkdj1 8y ago
    The press derived a valuation using valuation = price paid X 100/percent equity Those liquidation preferences mean that investors will pay more for their equity % than they would have without them which inflates the valuation estimates used by the above formula. The basic idea is that not all % equity is the worth the same amount, but it is assumed to when a valuation number is reported.
  - dasil003 8y ago
    You're being unusually oblique. It's conventional wisdom that liquidation preference multiples are tied to higher valuation, but you already knew that. Do you disagree with this or have some more interesting theory regarding liquidation preference?
  - ghazak 8y ago
    My assumption is that you sell a given stock with 1x liquidation preference, and the price of that stock is used to determine the valuation for the company, pretending the price is the same for the common stock as the stock with 1x liquidation?
rahimnathwani 8y ago
Yes, that's the usual case (but not in this case apparently). If a company has 5 classes of shares (common, A, B, C, D), then it's reasonable to value the company's equity by estimating the value of 1 share of each class, multiplying by the number of shares issued, and summing up these products. The more common method used by PR folks and journalists is: [Price at which class D shares were last bought] * [Total number of outstanding common, A, B, C and D shares] This is incorrect if the rights attached to the different classes are different enough that the values of the shares are different. And that's the usual case.
charleslmunger 8y ago
Investors are willing to pay higher prices for less equity for two reasons: 1. Normal investment of $Y at valuation X implies that you, the investor, think that the company is worth more than X. If it exits for more, you'll get more, less you'll get less. But investing $Y at valuation X with a 2x liquidation preference means that you think the company is worth merely Y. The valuation basically doesn't matter any more. If I invest $10 at a $100 valuation and the company exits at a $500 valuation, I get a $40 profit. If it exits at a $50 valuation, I've lost $5. The valuation I invest at makes a big difference for my profitability. But consider the same scenario with a 2x liquidation preference - in the happy case, I get the same profit. In the sad case, I've still doubled my money. 2. Investors in startups are not perfectly rational investors. If I own an existing stake in a company, I would fight tooth and nail to prevent any new money coming in from having a liquidation preference over me. But in truth, if the company can raise money at a $2 billion valuation normally, or a $4 billion valuation with a preference, a fund can report double the gains to the people who actually put money in it. So they stay quiet, show off the impressive paper returns of their current investment fund, and go on raising the next one. This effect is doubly pernicious when the later investors are also earlier investors - they can basically juice their own balance sheet. On paper, the existing stake is worth more because of the inflated valuation, and the new stake is a heads-I-win-tails-you-lose. And at the lowest preference are all the employees. Founders take money off the table in the inflated new rounds, so while they technically have a lower preference they've still cashed out significantly.
- deleted 8y ago
  [deleted]

askafriend 8y ago

They have a 1x liquidation preference from what I was told when I was given an offer somewhat recently. So 1x is standard, and nothing crazy like what you're implying.

stanleytang 8y ago

Nope. We raised on clean terms, 1x liquidation preference, no ratchets. Has been true for every single round —- we have and will never take dirty terms, even if it means a lower valuation

fipple 8y ago
Huh, cool to know. Congratulations and sorry for assuming.
- SmellyGeekBoy 8y ago
  Just a hint for next time, if that's the case then perhaps you should start your comment with "I assume..." instead of stating it as fact.

davidmr 8y ago

Given that Stanley just said precisely the opposite, I'm wondering why you made this comment. I'm not being a jerk, but I wonder why you spoke so authoritatively. Do you think that he's lying, or were you just speaking in generalities?

colinhmit 8y ago
Its a decent assumption at this stage in the VC cycle, especially when an established player (doordash v postmates) has a surprising multiple - Uber is a great example: https://www.bloomberg.com/view/articles/2017-11-16/softbank-thinks-some-uber-shares-are-worth-more-than-others https://www.bloomberg.com/view/articles/2017-11-16/softbank-...
deleted 8y ago
[deleted]

scarejunba 8y ago

You're just making up stuff. Why?

draw_down 8y ago

Clean terms are possible, believe it.