5 ms·

Some of your assumptions are off (e.g. our liquidation preferences are 1x non-participating pari passu; there are no seniority games), but I really enjoyed your

by pc 12y ago

Some of your assumptions are off (e.g. our liquidation preferences are 1x non-participating pari passu; there are no seniority games), but I really enjoyed your Bayesian vs frequentist statistics lecture at 6.945 back in the day!

keithwinstein 12y ago
Thanks, Patrick! (And thanks for posting Mosh on here and giving us a kick in the butt to really release it...) If Stripe just has one class of preferred stock, you're right that my assumptions are off, and I guess then it would be reasonable to impute the value of the newly-issued preferred shares to all the preferred shares. I would still disagree with imputing it to the common, especially since you presumably have your own appraisal of the common at a different price for tax purposes. Do you think there's a practical path to getting some more realistic numbers in these announcements? Does it matter? It seems like the people possibly being misled by these "TechCrunch valuations" are the press (which is enthusiastic anyway and loves to report the biggest number that can be attributed to somebody) and prospective/current employees (which could be a lot more serious, since people use these valuations to evaluate their own equity packages).
- coolsunglasses 12y ago
  >(And thanks for posting Mosh on here and giving us a kick in the butt to really release it...) Holy hell, I didn't know that was you! I use mosh every single day and I know a lot of other programmers at work and on IRC that use it daily as well! Thank you so much for releasing it :D
- nemanja 12y ago
  I think this is mostly a pedantic point for a late stage private convertible preferred. While private convertible preferreds typically have a dividend stream, conversion option (typically at spot) and liquidation preference (1x and presumably no participation feature in this case), they are theoretically more valuable than common. However, since there is no public market for the common, hedging that option wouldn't be efficient (if feasible at all) so I don't think the valuation really reflects that additional value (if at all). Investors develop a valuation view based on the metrics they would use for common (growth, fundamentals, perhaps some real option value, etc.) and invest based on that. All the preferred features are in the doc to provide some protection in the downside, which I don't think is much of a consideration in case of Stripe. You can see this pricing dynamic in S-1 filings of a few precedents (Twitter comes to mind) where founders were able to tender some of their common in the later rounds at the same valuation as preferred[1]. On the other hand, you are spot on when it comes to a public security (i.e. post-IPO convertible preferred, mostly capital/ratings instrument and quite uncommon in tech) - you would definitely bake-in the option value and dividend stream into the security valuation which would result in some conversion premium for the company and say 5-10 points in theoretical value above the par for investors. The difference is that primary buyers of the public convertible preferred security would be hedge funds who can short the common and effectively monetize the option value embedded in the security. If anything, the way I would look at this is that any credible bid for Stripe would probably have to be in 4-5x of that valuation. [1] See pgs. 139 (bottom, 2011 Third-Party Tender Offer) and II-3 (top) of Twitter S-1 (http://1.usa.gov/1cEqy0J http://1.usa.gov/1cEqy0J) for difference of ~1%, likely due to fees, etc.

by pc 12y ago

keithwinstein 12y ago

Thanks, Patrick! (And thanks for posting Mosh on here and giving us a kick in the butt to really release it...) If Stripe just has one class of preferred stock, you're right that my assumptions are off, and I guess then it would be reasonable to impute the value of the newly-issued preferred shares to all the preferred shares. I would still disagree with imputing it to the common, especially since you presumably have your own appraisal of the common at a different price for tax purposes. Do you think there's a practical path to getting some more realistic numbers in these announcements? Does it matter? It seems like the people possibly being misled by these "TechCrunch valuations" are the press (which is enthusiastic anyway and loves to report the biggest number that can be attributed to somebody) and prospective/current employees (which could be a lot more serious, since people use these valuations to evaluate their own equity packages).

coolsunglasses 12y ago
>(And thanks for posting Mosh on here and giving us a kick in the butt to really release it...) Holy hell, I didn't know that was you! I use mosh every single day and I know a lot of other programmers at work and on IRC that use it daily as well! Thank you so much for releasing it :D
nemanja 12y ago
I think this is mostly a pedantic point for a late stage private convertible preferred. While private convertible preferreds typically have a dividend stream, conversion option (typically at spot) and liquidation preference (1x and presumably no participation feature in this case), they are theoretically more valuable than common. However, since there is no public market for the common, hedging that option wouldn't be efficient (if feasible at all) so I don't think the valuation really reflects that additional value (if at all). Investors develop a valuation view based on the metrics they would use for common (growth, fundamentals, perhaps some real option value, etc.) and invest based on that. All the preferred features are in the doc to provide some protection in the downside, which I don't think is much of a consideration in case of Stripe. You can see this pricing dynamic in S-1 filings of a few precedents (Twitter comes to mind) where founders were able to tender some of their common in the later rounds at the same valuation as preferred[1]. On the other hand, you are spot on when it comes to a public security (i.e. post-IPO convertible preferred, mostly capital/ratings instrument and quite uncommon in tech) - you would definitely bake-in the option value and dividend stream into the security valuation which would result in some conversion premium for the company and say 5-10 points in theoretical value above the par for investors. The difference is that primary buyers of the public convertible preferred security would be hedge funds who can short the common and effectively monetize the option value embedded in the security. If anything, the way I would look at this is that any credible bid for Stripe would probably have to be in 4-5x of that valuation. [1] See pgs. 139 (bottom, 2011 Third-Party Tender Offer) and II-3 (top) of Twitter S-1 (http://1.usa.gov/1cEqy0J http://1.usa.gov/1cEqy0J) for difference of ~1%, likely due to fees, etc.