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> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. Why is that?

patio11 11y ago
A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%. [Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]
- foobarqux 11y ago
  > A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%. No, that's wrong. The investor loses nothing until the value declines to $500 million and then suffers linear losses afterward (i.e. if value is $100M then they lose $500-100=$400M).
- boomzilla 11y ago
  Uber has raised almost 6B. It's very unlikely their valuation drops to a few hundred millions as they must still have a few billions cash. However it's not impossible to see it drops to the 10B level or less if the economy tanks or they fail to execute, leaving little to the common shares. If I were an early employee at Uber, I would've been looking for anyway to liquidate my shares :), even if it that means shorting the NASSAQ.
- beambot 11y ago
  You are incorrect. Liquidation preference matters for ANY liquidation valuation less than the fundraising valuation. Let's say a VC invests $500M into Uber at a $50B valuation (1% equity). If Uber gets acquired for sub-$50B, then the VC gets their $500M back despite their ownership percentage. As an example, if Uber were acquired for $25B, then the VC would get their $500M back rather than the equity value of their shares (1% of $25B => $250M). And if they had 2x liquidation preference, they'd earn $1B on a $25B liquidation. This downside protection (sale of company for less than valuation at fundraise) is a key term on all priced rounds for this very reason. That's why these terms matter so much.

A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%. [Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]

foobarqux 11y ago
> A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%. No, that's wrong. The investor loses nothing until the value declines to $500 million and then suffers linear losses afterward (i.e. if value is $100M then they lose $500-100=$400M).
boomzilla 11y ago
Uber has raised almost 6B. It's very unlikely their valuation drops to a few hundred millions as they must still have a few billions cash. However it's not impossible to see it drops to the 10B level or less if the economy tanks or they fail to execute, leaving little to the common shares. If I were an early employee at Uber, I would've been looking for anyway to liquidate my shares :), even if it that means shorting the NASSAQ.
beambot 11y ago
You are incorrect. Liquidation preference matters for ANY liquidation valuation less than the fundraising valuation. Let's say a VC invests $500M into Uber at a $50B valuation (1% equity). If Uber gets acquired for sub-$50B, then the VC gets their $500M back despite their ownership percentage. As an example, if Uber were acquired for $25B, then the VC would get their $500M back rather than the equity value of their shares (1% of $25B => $250M). And if they had 2x liquidation preference, they'd earn $1B on a $25B liquidation. This downside protection (sale of company for less than valuation at fundraise) is a key term on all priced rounds for this very reason. That's why these terms matter so much.