You pick the Valuation, I set the Terms…

  1. The company is crushing it. The share price went up 4x between the Series A and Series B and then over 7x between the Series B and Series C. This is aggressive but not unheard of.
  2. The standard liquidation preferences on the Series A and B are followed up by an aggressive 3x liquidation preference in the Series C.
  3. Note that a 3x liquidation preference in a strong company is rare, but I used it here to represent a number of other mechanisms that can get embedded into term sheets which can ultimately have the same basic effect. They include: IPO ratchets, participating preferred, blocking rights, dividends, set exit dates and guaranteed returns. Be on the lookout for these terms in any term sheet.
  1. The stuff going on below $500M exit valuation is indiscernible besides the Series C being high and all others being low (I will zoom in on it).
  2. The return for the Series C is flat until the $3Bn exit valuation mark where it starts to increase like A, B and Common. This is because it’s where Series C will elect to convert to common. At any valuation lower than $3Bn, Series C holders (who own 10% of shares) would exercise their liquidation preference (worth $300M) instead of converting to common. If, for example, the company went public below $3Bn and all shares collapsed into one common class, the Series C holders could either block the deal or require that they be compensated with additional shares to lock in their 3x return (depending on the specific terms).
  1. Things are funky in the ~$300M valuation range (will zoom in on this as well).
  2. The lines converge to their basic share ownership percentages at around $3Bn, but are skewed at lower values.
  1. In the sub-$400M exit range, things are pretty stark: nobody besides the Series C gets a dime until $300M valuation is crossed.
  2. The next most senior preference belongs to Series B, who invested $25M at a 1x preference. They get all additional proceeds between $300M and $325M.
  3. Next is Series A who invested $5M at a 1x preference. They get additional proceeds between $325M and $330M.
  4. At $330M, the common shareholders start to get a return.
  5. As we saw before, the preferred shareholders stay on this linear return trajectory (with Series C staying flat) until $3Bn. Remember that Common owns 58% of the shares, Series A 14%, Series B 18% and Series C 10%, but this has almost no bearing on returns at lower exit valuations.
  1. Now the Series C owns 20% (vs. 10% in the previous example), which means more dilution for other shareholders.
  2. Common now owns 51% instead of 58% in the previous example. Series B owns 16% instead of 18% and Series A owns 13% instead of 14%.
  3. There is a total of $130M of liquidation preference, which is equal to the paid in capital into the business (vs. $330M in the previous case).
  4. The step up in share price between Series B and C is 3.2x.
  5. The company no longer gets to be called a unicorn :(
  6. A note on unicorns: this is the original article, and it talks about 39 unicorns of which 14 were still private. Oh how the times have changed.
  1. At $500M exit valuation, all parties are getting a return proportional to their share ownership (which makes sense given the $500M post-money valuation), but even at $300M, things are not so far off.
  2. Series B starts getting a return above a $100M valuation, Series A above $125M and Common above $130M valuation. Note that his company raised $130M — that’s a lot.
  • Scenario 1: $100M Series C at a $900M Pre-Money valuation with a 3x Senior Liquidation Preference
  • Scenario 2: $100M Series C at a $400M Pre-Money valuation with a 1x Senior Liquidation Preference

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Finance Geek in Israel. Former NEA, Morgan Stanley, Stanford. Finance & MechE nerd. Verissimo.vc

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Alex Oppenheimer

Alex Oppenheimer

Finance Geek in Israel. Former NEA, Morgan Stanley, Stanford. Finance & MechE nerd. Verissimo.vc