Founders were willing to cede certain protections to their venture-capital backers to get a billion-dollar valuation. They will now regret it
2006 Yahoo, a faded internet giant, offered to buy Facebook, then a fledgling, for $1bn. Billion-dollar offers for startups were then quite rare. “I thought we should at least consider it,” recalls Peter Thiel, an early Facebook backer, in his book, “Zero to One”. The initial reaction of Mark Zuckerberg, its founder, was firmly to say no. “This is just a formality,” he told his board. “We’re obviously not going to sell here.
Take the case of an imaginary startup. WeWhack is a tech platform that connects people who carry grudges to contract killers. The founder, Mr Soprano, owns all of its common stock. An early-stagefirm, called Seedy, gives him $20m in exchange for a 20% stake. Mr Soprano can boast that his company is worth $100m, the “post-money” valuation. This is the figure quoted in newspapers and trade magazines.backers such as Seedy typically receive convertible preferred stock.
Things become more complex as the business matures. Mr Soprano decides to sell a further 20% of WeWhack to fund its global expansion. There is lots of interest fromfirms. The highest bid comes from SoftMoney. It is willing to pay $150m for senior preferred convertible stock, meaning it is first in the queue at the exit, ahead of Mr Soprano and Seedy. The post-money valuation is $750m.
A good early-stage investment partner will advise founders not to go for a headline valuation if it comes with such terms, says Richard Wong, of Accel, afirm. They don’t always listen. After many funding rounds, a venture-backed company might have half a dozen layers in its capital stack, each with its own protections and voting rights.
France Dernières Nouvelles, France Actualités
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