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I have asked this here before, but did not get a good answer. When a startup takes money from an investor with significant preferences and ratchets, why is the
by mavelikara 7y ago
I have asked this here before, but did not get a good answer.
When a startup takes money from an investor with significant preferences and ratchets, why is the 409a valuation for common stock the same as those the investors got? At the startup I worked, during the initial rounds the common and investor class were priced significantly differently. But in later rounds they converged almost to the same price. What is the rationale for doing this?
- WisNorCan 7y agoThe 409a valuation isn’t typically the same as the investor price early on. This accounts for lack of liquidity and preference. However, as those differences start disappearing, e.g. when WeWork and Uber were about to IPO, the 409a converges with the investor price.
- mavelikara 7y agoBut why? By the price of common and investor class of shares converging, the implication is that the economic value of the preferences and other arrangements investors get is $0. That does not sound right to me.