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As a programmer who is generally unfamiliar with business lingo, can someone explain what this valuation round means? Are they saying that Instagram is worth $5

As a programmer who is generally unfamiliar with business lingo, can someone explain what this valuation round means? Are they saying that Instagram is worth $500,000,000? How realistic is that number?

sparky 15y ago
Valuation is (Dollars I pay)/(Fraction of the company I buy). In this case, they are selling 10% of the company for $50 million. It's not exactly the same thing as saying that these investors would be willing to buy all of Instagram for $500 million because both parties' utility functions are seldom linear. It's the closest thing we have, though.
- tlogan 15y ago
  And one more question from not-so-business savvy reader. If Sequoia got this deal with 2x liquidation preference then if Instagram is sold for $100 then Sequoia will still profit $50M. Correct?
  - sparky 15y ago
    'Liquidation preference' is a term that applies to what I think of as 3 or 4 related-but-separate concepts. In the simplest situation, with no vested options or other complications, yes, the investor would get all $100 million, assuming nobody else has a liquidation preference. Vested options and other term sheet items like 'participating preferred' make things more complicated, so you really have to read the entire term sheet to figure out who gets what under what circumstances. Good resources: http://www.burningdoor.com/askthewizard/2007/04/venture_terms_liquidation_pref.html http://www.burningdoor.com/askthewizard/2007/04/venture_term... http://www.feld.com/wp/archives/2005/01/term-sheet-liquidation-preference.html http://www.feld.com/wp/archives/2005/01/term-sheet-liquidati...
damoncali 15y ago
It is an implied valuation, not a real valuation. The implication being if you payed $50 for 50% of the stock, then the company value (100%) is $100. But, and its a huge "but", VC investments are almost always (especially series B like this one) preferred stock. This preferred stock gets (you guessed it) preferential treatment when compared to common stock, which is usually what founders have. Those preferences are numerous, arcane, and very significant. For example, suppose an investor wants to invest $10M in a company for 50% of the stock. The entrepreneurs say, "no, we'll give you 30%. The investor says, "Fine. But I want a 3x liquidation preference. They do the deal. Later, the company is sold for $50M. In this case, the investor gets $30M (3x their investment, or 60% of the company) and everyone else gets $20M. So what was the real value the investor paid for? It's tough to tell because it depends on what happens next. Now go an pile up several other terms like that and you can see how hard it is to truly imply the total value of the company from the price paid for preferred stock. In fact, it's impossible unless you know the terms (which are rarely public), and even then you're guessing.

sparky 15y ago

Valuation is (Dollars I pay)/(Fraction of the company I buy). In this case, they are selling 10% of the company for $50 million. It's not exactly the same thing as saying that these investors would be willing to buy all of Instagram for $500 million because both parties' utility functions are seldom linear. It's the closest thing we have, though.

tlogan 15y ago
And one more question from not-so-business savvy reader. If Sequoia got this deal with 2x liquidation preference then if Instagram is sold for $100 then Sequoia will still profit $50M. Correct?
- sparky 15y ago
  'Liquidation preference' is a term that applies to what I think of as 3 or 4 related-but-separate concepts. In the simplest situation, with no vested options or other complications, yes, the investor would get all $100 million, assuming nobody else has a liquidation preference. Vested options and other term sheet items like 'participating preferred' make things more complicated, so you really have to read the entire term sheet to figure out who gets what under what circumstances. Good resources: http://www.burningdoor.com/askthewizard/2007/04/venture_terms_liquidation_pref.html http://www.burningdoor.com/askthewizard/2007/04/venture_term... http://www.feld.com/wp/archives/2005/01/term-sheet-liquidation-preference.html http://www.feld.com/wp/archives/2005/01/term-sheet-liquidati...

damoncali 15y ago

It is an implied valuation, not a real valuation. The implication being if you payed $50 for 50% of the stock, then the company value (100%) is $100. But, and its a huge "but", VC investments are almost always (especially series B like this one) preferred stock. This preferred stock gets (you guessed it) preferential treatment when compared to common stock, which is usually what founders have. Those preferences are numerous, arcane, and very significant. For example, suppose an investor wants to invest $10M in a company for 50% of the stock. The entrepreneurs say, "no, we'll give you 30%. The investor says, "Fine. But I want a 3x liquidation preference. They do the deal. Later, the company is sold for $50M. In this case, the investor gets $30M (3x their investment, or 60% of the company) and everyone else gets $20M. So what was the real value the investor paid for? It's tough to tell because it depends on what happens next. Now go an pile up several other terms like that and you can see how hard it is to truly imply the total value of the company from the price paid for preferred stock. In fact, it's impossible unless you know the terms (which are rarely public), and even then you're guessing.