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Using the pre-money valuation of a venture capital round to price common stock is a bad idea that is not supported by economics. The rights granted to the VC's
by bjterry 13y ago
Using the pre-money valuation of a venture capital round to price common stock is a bad idea that is not supported by economics. The rights granted to the VC's preferred shares are REALLY, REALLY valuable, but the pre-money valuation values all shares as if they have the same package of rights. With things like participating preferred, dividend rights, not to mention the base liquidation preference, the value of common stock bears no relationship to the value of the preferred shares. They are only remotely similar in the event of a billion dollar IPO, when all the downside protection gets lost in the wash. This is a fundamentally low-probability scenario.
- maxcan 13y agoA valid criticism. I've addressed this above and added a paragraph in the essay to deal with it too. Thanks!
- robrenaud 13y agoHow much should the common shares be discounted vs the preferred shares? Do you have any rough rules of thumb?
- mifeng 12y agoWhile prefs and commons certainly differ in value, I don't think it's matters much given that the goal here is to give employees a fairer, more transparent way to allocate between cash and equity compensation. The valuation differences are more stark in mid- and late-stage startups; at the same time, only a small amount of the overall equity is being granted to employees. Where I think this model has a real impact are to help the first few employees figure out compensation, which is a complete unknown right now. Pref vs common valuation matters much less at that point.