Who’s Reaping the Gains from Unicorns?

The short answer to the question posed is...the last preferred stock investor with the top most liquidation preference is reaping the gains.

PitchBook posed the question: Private vs. public market investors – Who’s reaping the gains from the rise of unicorns?

I have previously written about the flaw in the analysis about Unicorns and feel this article does the same. The valuation last achieved in a unique class of preferred stock is (mistakenly) applied to the entire cap table of the company in order to assume it’s worth over $1 billion.

This is untrue because the earlier investors (particularly founders and common stock holders) are not promised minimum returns on their investment/ownership or an adjustment in their conversion price if a liquidation event (including an IPO) does not achieve pricing at a minimum threshold.

I would argue part of the reason for the decline of IPO’s in the market is this:

The valuation provided by the market to the single class of common stock (after conversion of the various preferred stocks), in most cases, cannot hit the marginal Unicorn valuation of the last investment in the most recent preferred stock, thus giving the appearance that the Unicorn lost value.

In fact, the last investor likely made exactly the minimum return they expected while the earliest investors took the hit for the apparent decline in valuation.

What would be far more interesting to me is an analysis of the returns the earliest investors receive after all the financial protections are applied to the multiple layers of preferred stocks.

As we have seen in the liquidation of failed Unicorns, the common stock and option holders may come out with little or nothing while the preferred stock enjoys their liquidation preference to return all or part of their investment first. The IPO is the great equalizer bringing all the classes of shares into one through what is usually a complex conversion calculation.

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Brad Harries

Brad regularly shares his unique insights and investment banking expertise with readers, viewers and listeners of various forums like The Information, LinkedIn and other online publications that invite the views of their readership. His writing and speaking covers a wide range of topics critical to business owners, CEOs and those who advise them. He can offer simple explanations of often hidden information behind complex private valuation structures that imply one thing in a public market context but something very different among pre-public companies that aren’t required to disclose the details. Above all, Brad's not shy about challenging his peers and readers with an alternative perspective on market activity and health.

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Doug Schmidt
Partner and Investment Banker

Doug is one of the most respected middle market investment banking professionals in the Mid-Atlantic and has actively contributed to the growth of the region’s business community for over 30 years.

Brad Harries
Partner and Investment Banker

Brad spent the majority of his 40-year career with Wall Street firms developing unique expertise in serving the corporate finance needs of emerging growth companies.

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