Valuation of 2 billion is not just for investors with downside protection, but for all the investors that own any part of the stock. Valuation is valuation - let's not confuse it with what will happen in the future - just because a company is worth 2 billion today, doesn't mean it will be worth that or more in X years. But today, if investors are willing to pay a price of 2 billion and founders/current investors are willing to sell equity at 2 billion - then current valuation is 2 billion, plain and simple
The point is that with public equity shares, the extrapolation from the price of a single share to the value of the entire company is much simpler. This is for two reasons: first, everybody owns the same security; second, the payoffs are continuous in the market price of the shares.
Neither of these things hold for VC investments. Not everyone owns the same security, and payoffs are NOT continuous in the market price of the shares. This is because of the liquidity preference that is usually part of the deal.
Valuation is valuation - let's not confuse it with what will happen in the future - just because a company is worth 2 billion today, doesn't mean it will be worth that or more in X years.
No, valuation is not just valuation. I've just spelled out two reasons valuations can sometimes not be directly comparable. That's the whole point.
No, it's not quite that simple, which is exactly the point of the article.
If I own 1% of a company that raises a round at a $2B valuation, my shares are worth $20M, in theory. But does that mean I can sell my shares for $20M? No, it does not.
Even if I can find a buyer for them, they won't fetch the same price that the latest investors paid, because of the liquidation preference. (If they do, either I've found a sucker, or the company got suckered in the latest round.)
If I can't sell my shares for $20M, then they aren't really worth that much. Twenty million is a convenient estimate, but there's a reason we sometimes talk about people being rich "on paper."
True, but the risk profile for a late-state venture investor and an investor in public markets are very different. Let's say a company's valuation starts at 2 billion and drops to 200 million at some later date. If someone invested 100 million at 2 billion valuation, their losses from that value drop are very different. The private investor with downside protection due to liquidation preference gets their 100 million back, while the investor in public markets would get back only about 10 million. Late stage investments, such as those in Snapchat, are essentially bets that the value of the company at exit will not be below the value of the round in which they are investing.
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Valuation of 2 billion is not just for investors with downside protection, but for all the investors that own any part of the stock. Valuation is valuation - let's not confuse it with what will happen in the future - just because a company is worth 2 billion today, doesn't mean it will be worth that or more in X years. But today, if investors are willing to pay a price of 2 billion and founders/current investors are willing to sell equity at 2 billion - then current valuation is 2 billion, plain and simple
The point is that with public equity shares, the extrapolation from the price of a single share to the value of the entire company is much simpler. This is for two reasons: first, everybody owns the same security; second, the payoffs are continuous in the market price of the shares.
Neither of these things hold for VC investments. Not everyone owns the same security, and payoffs are NOT continuous in the market price of the shares. This is because of the liquidity preference that is usually part of the deal.
No, valuation is not just valuation. I've just spelled out two reasons valuations can sometimes not be directly comparable. That's the whole point.
No, it's not quite that simple, which is exactly the point of the article.
If I own 1% of a company that raises a round at a $2B valuation, my shares are worth $20M, in theory. But does that mean I can sell my shares for $20M? No, it does not.
Even if I can find a buyer for them, they won't fetch the same price that the latest investors paid, because of the liquidation preference. (If they do, either I've found a sucker, or the company got suckered in the latest round.)
If I can't sell my shares for $20M, then they aren't really worth that much. Twenty million is a convenient estimate, but there's a reason we sometimes talk about people being rich "on paper."
True, but the risk profile for a late-state venture investor and an investor in public markets are very different. Let's say a company's valuation starts at 2 billion and drops to 200 million at some later date. If someone invested 100 million at 2 billion valuation, their losses from that value drop are very different. The private investor with downside protection due to liquidation preference gets their 100 million back, while the investor in public markets would get back only about 10 million. Late stage investments, such as those in Snapchat, are essentially bets that the value of the company at exit will not be below the value of the round in which they are investing.