[neelm]

One of the reasons that you hear CEO's want a $B valuation is that it becomes "easier to attract top talent". I'm not sure that is valid. You want talent that believes in your mission. Not all $B valued companies have the same risk/reward scenario. It'd be helpful to have some metric of the capital efficiency a company has to get to the $B mark.

The one good side effect is that private investors are taking all of the risk. If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000. It could however impact the LP market and the number/size of VC funds could go through another cycle.

[w4]

> The one good side effect is that private investors are taking all of the risk. If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000.

I'm not so confident about this. One of the reasons the 2000 correction was so dramatic was how interconnected tech revenues had become. Startup A had revenue because startups B and C were customers. When B went under, A started to have trouble. Then A goes under, so C loses their customers who were being paid by A, and so on. Revenues were basically a shell game funded by VCs.

This pattern looks like it's repeating itself. Look at public companies like Facebook and Twitter: huge portions of their ad revenues come from app install ads. It's safe to assume that a lot of those ad buys wouldn't be happening without VC funding. How about IaaS/PaaS providers? Same story. There will still be customers for many of these products if the bubble pops, but how well can these companies handle a rapid reduction in demand? And then there are ripple effects. How will commercial REITs fare? How will consumer spending be effected when people currently earning inflated salaries paid for by VC money suddenly can't find a job?

At this point it's all one big hypothetical, but I would hesitate to assume that a correction will be limited to the private market. The public market has plenty of exposure to the private bubble by proxy.

[shostack]

Source?

A lot of app install ads are from companies with solid revenue streams that are not startups. A lot are also for mobile games monetizing (oftentimes quite profitably) off IAP.

I feel like there is a common claim floating around that a lot of the big tech companies in the advertising industry (Google, FB, Twitter, etc.) are going to take a huge hit if something causes funding to dry up for startups.

I have yet to see anything material indicating that a notable portion of their ad revenue is driven by such companies. Are these companies spending with them? Sure. But in terms of absolute dollars and total % of revenue, my assumption would be it is a drop in the bucket compared to large established brands like CPG companies, clothing companies, auto companies, etc.

[BraveNewCurency]

I might agree about ads, but not IaaS.

Let's say a company gets $10M in funding. It's hard to see how it can spend more than $100K/year on IaaS. On the other hand, there are plenty of blue-chip companies spending $millions on IaaS. (i.e. Try to do drug research without it.)

And even if all VC money went away, for every VC funded company, there are 100 startups using 1/100th of IaaS.

[bryanlarsen]

Top talent wants a low valuation so that stock options can provide a big payout.

[beambot]

Plus: Anyone who is "top talent" is probably well aware of the negative effect of liquidation preferences on employee common stock value in an acquisition (the topic of the article). So $1B valuations with heavy liquidation preferences are not a good thing to these folks.

[aqme28]

However liquidation preferences are opaque to candidates, so "top talent" just has to assume there are liquidation preferences on all companies.

[beambot]

Those terms are very material to a candidate's compensation package; maybe they should be made known. (Honesty and transparency?!)

[mahyarm]

Once your become a $1B+ startup, your options for liquidity events reduce greatly. Fewer and fewer markets can buy your company. Often when a company has a high valuation, people think it's 'too late' to join the unicorn. If the company isn't profitable on some level yet either, it's even worse.

[ryandamm]

This is a good point. The converse is also true, though: high valuation means you have lots of dollar-valued equity to use to entice possible employees. And that scales with your valuation.

Fun fact, a friend was complaining to me about how hard it is to hire Android engineers, because he keeps getting outbid by Uber. He's at a public company, by the way, but couldn't match their pay packages (including ~$1m in stock options).

Yes, you won't necessarily see the same crazy run up in stock value as if you joined at the ground floor, and yes, you'll owe taxes on the nominal value of the option price, etc... but that's still a lot of money, and it's arguably de-risked relative to an A-series startup. (Then again, if the company you're looking at isn't profitable, maybe it's not de-risked... buyer/employee beware.)

[mahyarm]

Uber is a bit of a special case. It's basically the next potential facebook / google.

[otterley]

If you join Uber at this point, you're only getting RSUs, not equity. They're way too large to offer shares to any more employees without triggering SEC disclosure requirements.

[mahyarm]

TBH, RSUs are better if you cannot afford to early exercise. Otherwise you have the 90 day option expiry problem after leaving your job, unlike most RSUs. Options also get bad with AMT tax if you didn't early exercise either. RSUs stay with you even after you leave the company.

Oh well, you lose long term capital gains tax benefits, but most people do not have the money to even exercise their vested options, so they sell during IPO and have equivalent tax treatment as an RSU.

Some companies now have option expiry dates at 7 years, but those can be counted on one hand.

[rm_-rf_slash]

This is a severely under-appreciated situation. One has to wonder how many good employees a company misses out on because the traditional style of Silicon Valley capitalism is to be one of the first 20 people in the company or you'll be clawing for scraps like the next 2,000.

[shostack]

Is there an opportunity for any meaningful equity/options when joining a company that size? Or should candidates be focused on salary and other benefits at that size?

[bcherry]

Absolutely. In fact it's somewhat better. If you join a big company like that, they're not going to be able to give you 1% of mythical future company value, but they CAN give you X shares now with very real value. If you join a 500-2000 person company with a $1B+ valuation and stick it out for four years of hard work and promotions - you can easily be looking at a $500k-$2M payout (above and beyond your high salary). More is possible too. This is why even giants like Facebook and Google can still attract top engineers - they can give you equity that's basically equivalent to cash - and lots of it.

Joining a smaller company gives you the chance at a massive payout of $10M+ - but I'd bet your 4-year "expected value" would be much less than joining a bigger company. For one - your options are going to be worth anywhere between $0 and $1B - but heavily weighted towards zero. Two - you have to actually buy your options with cash, which reduces mobility because this is very risky! This often costs $20k or more. So you may leave your options on the table. Very few people would be leaving options on the table at somewhere like Uber today if they quit. You'd find the money and buy your shares. Three - your potential exits are numerous but many of them are the sort of deals that kind of devalue your equity to near worthless (due to LP) and instead buy the team with employment offers and new golden handcuffs - which can be highly variable. An IPO or mega acquisition is a clean transaction for common stock holders.

[btrautsc]

This is highly situational. I would love if the best of "X" type employee out there were all hunting for 2-5M valuation (or whatever you consider low) startups - but that isn't as common. Many people are risk averse.

I think part of this scenario is that companies raising tens or hundreds of millions at billion++ valuations are hiring "scaling talent".

Scaling as in hiring many good to great people, but lots of them, some of whom overlap. Multiple product managers, many great engineers, great heads of sales/ HR/ operations.

Oftentimes they are focused on becoming huge, scalable, consistently growing revenue generating operations.

[flog]

So should this mean talent should be discounting equity when negotiating deals with still-private companies? If so, how much?

[neelm]

Yes. Not always easy to answer. Some factor of revenue growth, margins, how much capital the company has already raised, understanding the burn rate, how much has been spent vs dry powder, liquidation preferences assumption. Probably a lot I'm missing. There should be an easier way for a prospect to simulate a cap table with a simple set of assumptions.

[avn2109]

A good first approximation is to regard your after-tax equity upside == 0 in all ventures that you didn't found.

[myth_buster]

  If there is an adjustment in valuations across the industry, 
  it should not effect the public markets the way it did in 2000. 

Isn't this only in the case where the said unicorn is not IPO'd. Like in the case with Groupon which lost 85% of it's value since IPO, the public market is affected.

If these 59 unicorns go public and begin to loose money, they would effectively trigger a domino I believe.

Like the VCs who get in during the E/F rounds, the general public is also susceptible to similar behavior.

[neelm]

Yes that is true. You're exposing an assumption of mine which is that many of these companies will not necessarily IPO.

However even when they do, they will be a lot more operating history and financial information than what companies typically had in 2000. This is why you're seeing some recent tech IPOs that went public at a valuation lower than their last private round. An example of this is Hortonworks.

[myth_buster]

I hope this becomes the norm but I'm a bit wary as IPO conversion provisions [0] may come into play.

[0] https://www.fenwick.com/publications/pages/the-terms-behind-...