“Oh, what a feeling — fuck it, I want a billion”
– Jay-Z, Picasso, Baby

Next to quoting rap in blog posts, being a Unicorn is the next big thing. While it’s easy to shout “bubble bubble”, there’s something most commentary on the subject doesn’t mention. Most headlines are “Company X raised at a billion dollar valuation”. Ever wonder why everyone suddenly raises at exactly that number?

It’s a game of egos. Founders want to have the Unicorn Club membership card, and VCs aren’t too unhappy about getting press for having a large wallet and doing huge deals. VCs also know that the Billion Dollar card is a great negotiating chip in competitive deals to get the founder over the line.

I bet that if you would run the numbers (if you have them), there’s a gap between company valuations from about $800M to $1B – where the final valuation of a deal is driven up in this game of Unicornization.

So, are all these companies overvalued by 20%?

No. One thing that the press doesn’t write about are other terms and general economics in deals. This is because they don’t know the inside details, and often don’t care much about venture economics and terms (which is fine). Also, ONE BILLION DOLLARS is a great headline, and I can’t blame anyone for using it.

In these negotiations, the 1 Billion mark is a goal the founders or previous investors have their mind set on. Now, there’s a ton of other terms that can be played with to reach that number.

For example, new investors can:

  • Demand a higher liquidation preference for an exit that is below the 1B mark (or just demand a higher liq pref, period)
  • Have a staggered pay out of the investment based on company metrics (this means they actually invest less money now)
  • Get other control rights (board seats, etc) for the higher valuation to keep the company in check
  • Play the option pool shuffle: A new option pool is installed, pre money – everyone dilutes, except for the new investors (note that undistributed option pools may mean a lower effective valuation)
  • Play tricks with a combination of secondaries at lower valuations and smaller actual cash injections – especially if the company has enough money in the bank.

This is not always good for the founders, as you can tell. However, I’m not one to dispute the outsized attention these rounds get, so the trade off might be valuable somewhere else.

After all, if you manage to build a company to a valuation of hundreds of millions of dollars, you should know what you’re doing.

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