FlyTitle: Buttonwood

Why a lot of startups will come to regret their unicorn status


经济学人双语版-压垮 Stacked and whacked

IN JULY 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.”

二〇〇六年七月,日渐式微的互联网巨头雅虎提出以10亿美元收购当时羽翼未丰的Facebook。对创业公司来说,10亿美元的出价在当时非常罕见。“我认为我们至少应该考虑一下。”Facebook早期的投资人彼得·蒂尔(Peter Thiel)在他的著述《从0到1》(Zero to One)中回忆道。而创始人扎克伯格最初的反应却是断然拒绝。“这只是走个过场,”他在董事会上表示,“我们显然不会把公司卖掉。”

Entrepreneurs are supremely confident about their eventual success. They have to be. Startups usually fail; in the vernacular of Silicon Valley, they have a high “kill rate”. It takes unusual self-belief to even set up. Mr Zuckerberg’s was vindicated in spades. Until recently investors were tripping over themselves to throw money at would-be Zucks. Founders were willing to cede certain protections to their venture-capital (VC) backers to get a billion-dollar valuation. They will now regret it. They are, in effect, sitting under a mountain of debt-like claims on their companies.


Take the case of an imaginary startup. WeWhack is a tech platform that connects people who carry grudges to contract killers. (In a bull market for VC, the legal and moral concerns about the business model are dismissed as so much naysaying.) The founder, Mr Soprano, owns all of its common stock. An early-stage VC firm, 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.


But in reality it is worth less. VC backers such as Seedy typically receive convertible preferred stock. This is a security that is specific to venture capital, says Jean-Noel Barrot of HEC Paris, a business school. “Convertible” means the security converts into common stock at “exit” ie, when the company is either sold to a bigger company or is listed on the stock exchange. “Preferred” means the backer will be paid back before common stockholders: it has liquidation preference. If, in our hypothetical case, the exit value is between $0 and $20m, Seedy gets everything. If it is between $20m and $100m, the VC gets $20m and Mr Soprano gets the rest. Only if the exit value is above $100m will both parties be paid in proportion to their shareholding.

但实际上公司不值这么多钱。Seedy等风险投资者通常得到的是可转换优先股。这是专为风险投资提供的一种股份,巴黎高等商学院的让-诺埃尔·巴罗(Jean-Noel Barrot)表示。“可转换”是指在“退出”时(即公司要么被大公司收购,要么在股票交易所上市),股份可以转换成普通股。“优先”是指投资者有清算优先权,能先于普通股的股东获得偿付。在我们假设的例子中,如果退出价值在0到2000万美元之间,那么所有的钱都归Seedy。如果退出价值在2000万到一亿美元之间,那么Seedy得2000万美元,其余归索普拉诺。只有当退出价值超过一亿美元时,双方才会按持股比例分配资金。

Were Seedy granted common stock, Mr Soprano could in principle immediately sell WeWhack for $20m (the value of its cash holdings), pocket $16m (his 80% share) and return the rest to Seedy. Preferred stock is a disciplining device. It encourages the founder to use the $20m to create a firm that is worth a lot more.


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 from VC firms. 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.


But Mr Soprano wants to be the founder of a unicorn, a startup valued at $1bn or more. SoftMoney says it will pay $200m, for a post-money valuation of $1bn, if it gets greater protection should things go wrong. It is granted two times liquidation preference: an assurance that it will make back its $200m twice over. WeWhack’s exit price must reach $400m before anyone else makes a cent. But Mr Soprano is fine with that. He is confident that his business is worth billions.


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, a VC firm. 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.


When funds are raised at lofty values, it can create misalignment later on between founders, early-stage VCs and late-stage investors, says Simon Levene of Mosaic, a London-based VC firm. A founder sitting under a mountain of preference stock is like the manager of an over-indebted firm. In a bear market, his stake is probably worthless. So why not blow the company’s remaining cash on perks, take undue business risks (“gamble for redemption”) or simply give up? He may use his voting rights to stymie an exit for other investors. It can get messy.

伦敦风投公司Mosaic的西蒙·列文(Simon Levene)表示,在高估值融资之后,创始人、早期风投公司与后期投资者之间可能出现利益不一致。背负着大量优先股的创始人就像一家负债累累的公司的经理。在熊市中,他的股份可能一文不值。与其这样,为什么不把公司剩余的现金拿来发福利,或者去冒过高的商业风险(“破釜沉舟赌一把”),再或者干脆放弃?创始人可能利用自己的表决权来阻挠其他投资者退出。事情可能变得一团糟。

Everyone can be a dreamer in a buoyant market. The kill rate is low. But when trouble strikes, it reverts to the mean—and, as a VC bigwig puts it, “a lot of things get whacked.”