[philrapo]

Are you saying you'd value shares at the same amount with or without a liquidation preference? I'd value the shares with liquidation preference at a premium, no contest.

e.g. 1,000 total shares. You can buy 10% (100 shares) for $10mm with 2x liquidation preference included.

Now say I remove the liquidation preference. Your valuation model doesn't change? Mine certainly does. I'd value the shares lower, causing a lower company valuation for the 10% of the company that's changing hands.

>The reason there are $1B+ valuations is primarily because the VCs believe the ventures will come to dominate major areas of commerce, will typically go public with sky-high valuations, and will continue to grow and dominate even after all that. Investing $100M at $1B valuation is risky but pays hugely if the company later becomes valued at $100B+.

It pays hugely even in a down round with liquidation prefs. I'd invest $100mm at a $1bn valuation with 2x liquidation preference, even if I thought the monetization event would occur at a $300mm valuation (down -70%). I'd still get paid out $200mm for a +100% return. If I didnt have the liquidation preference, I would've lost -70%.

[ryandamm]

I was under the impression that anything other than a 1x liquidation preference is extremely founder-unfavorable and very rare. Am I mistaken? Are these unicorns wandering around with significant (2x, 3x) preferences attached to them?

Because otherwise, a 1x only says you get your principal back. Covers the VC's butt in a down round, but nothing crazy. To the extent it comes out of founders' hide, well, you took money and didn't manage to make it grow. (The effect on rank-and-file employee options is a little less defensible, though, since they have less control over total execution.)

[philrapo]

I haven't seen any data on it, but that's my understanding as well. (>1x is rare in today's market). But the NYT article does mention Honest Co. with a 2x on $1.7bn valuation, so there's at least that anecdote.

[philrapo]

Actually I have heard/read that it gets more common in very late stage (near-IPO) financing rounds as well. For example, when a company is expected to IPO in the next 12-18 months but needs some more cash runway, there are funds that specialize in providing this type of "bridge loan" financing, which often comes in the form of preferred stock with heavy liquidation prefs.

[ryandamm]

Yeah, the fact that they have to cite Honest Co. (not one of the big names), and that the liquidation preference works out to a tiny fraction of their current valuation, suggests to me this isn't a huge concern.

Then again, I don't know how transparent the financing is for these enormous companies, so maybe it is a bigger deal than I think. (I also don't lose too much sleep over it.)

[grellas]

Sorry for not putting it more clearly. When I said that liquidation preferences do not drive up valuations, I meant (in the spirit of the article) that this is not an explanation for why valuations today are extraordinarily high for this number of companies as compared to prior eras when they also had liquidation preferences.

Of course, as your comment correctly points out, a liquidation preference has value, even immense value for its downside protection. And this value is reflected in the valuation. It just isn't the reason for a huge upward spike above the historical norm.

Hope this clarification helps.

[freshhawk]

I don't see where the article stated that this is the explanation for current valuations. Just that it "very likely pushes valuations even higher", which is an understatement if anything.

[pbreit]

I don't think the impact is as great as many think. Unicorns and other companies headed in that direction almost never liquidate so the preference rarely comes into play meaning the valuations are more real than many think.