Would love to hear from other founders here comment on raising money when you don’t need to raise. To me it seems unfair to dilute employee equity for the sake of having an extra 100M in the bank.
"I’m a big fan of Slack Technologies Inc.’s approach to corporate finance. Near the peak of the unicorn boom, in 2015, Slack Chief Executive Officer Stewart Butterfield correctly noted that “it might be the best time for any kind of business, in any industry, to raise money for all of history, like since the time of the ancient Egyptians.” The relevance of that point to Slack was not obvious, though, because it happened to have all the money it needed. A less financially savvy tech unicorn might have taken that as a reason not to raise more money, but Slack decided that cheap money was cheap money.
...Is 2019 the best time in history for tech unicorns to raise money from the public markets? Ehh, not particularly. The S&P 500 is down more than 10 percent from its peak last year. Volatility is up. There is an overhang of several very large rumored unicorn initial public offerings, most notably one from Uber Technologies Inc., which might distract investors from other
unicorns. Fortunately for Slack, it still doesn’t seem to need any money, perhaps because it did so very much top-ticking in the private markets. This gives it a certain amount of flexibility with respect to corporate finance. So:
Slack Technologies Inc. is planning to go public through a direct listing, "
ya but if you raise an extra 100M, that most likely is an up-round, which means the value of employee's equity has increased
example: as an employee you own 10% of the company. The 10% is worth $10. After company raises a 100M round and dilution has occurred, you own 1% of the company, but that 1% is now worth $50
who is being treated unfairly? I don't quite understand
The problem arises when the company exits at below the ridiculous valuation, inflated by the up rounds.
Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit. This means that while the employee private equity may increase in value, the employees get pennies on the dollar during the exit because the majority of the payout goes to the investors who inflated the price to begin with.
It gets worse when employees pay taxes on the equity at the inflated valuation, but there are ways claw that back later.
An exit is an exit. Failed companies getting acquired is still an exit, whether it happened early without funding or later with a ridiculous valuation.
The difference is the expected value of income that the employees are given in equity, which is especially nefarious.
Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit.
This is not a thing that happens in the vast majority of circumstances. Preferences are for downside protection not a way for investors to actually make money. No one invests with the goal of making use of them.
#2 is not at all clear. Investors lost (collectively) over 125 million dollars. The only employess that lost money are those that exercised stock options and had to pay taxes on unrealized gains. It's highly doubtful that this totaled nearly as much as the investors lost.
The value of the company has increased either way, the fact a round happens doesn't change the underlying value but merely signals it. Since employees generally can't sell their shares either way that signaling doesn't impact them. So, in your example, before the round you actually owned $500 and after the round you own $50.
No. I see what you mean, but in practice that's not what happens.
Numeric value is determined at time of sale. Without a sale, the object has no "value". It might be useful to you in some way, but it's value is 0 unless you can sell it. There is no such thing as "underlying value"
example: I have a normal orange that I bought for $5 at the supermarket. The orange's underlying value is $5. If I sell it to my friend for $10, the value of the orange is now $10. If no one is willing to buy it, its value is $0.
The same thing happens when you raise a new round. When you raise a new round, you've made a "sale": someone paid money for it. That exchange of money/shares is what determines value.
While I agree that selling something at the highest price you can is the best way to appraise value, I disagree that an up round necessarily increases the equity value of employees (unless the employees can sell off their equity during the round).
To use your orange metaphor, while it is true that if no one else wants the orange the value of the orange is $0, I don't have to sell it to have a good idea of what the price of an orange is. For example, if there are people offering to buy my orange for $8 and I know that a typical bid-ask spread for fruits is %50 of the bid and most transactions occur at midpoint I can be relatively certain that the orange is worth $10 despite no transaction occurring and there being no market for oranges (if there is a generic orange market you have access to then the entire point becomes moot since you can just take the market price).
yes, but the key part of your statement is "if there are people offering to buy". Everything else about spread/bid/ask/etc is just mathematic sugar.
"People offering to buy" is key.
It's very easy for a founder to tell employees "hey I met with a VC yesterday, and they were interested in investing at $x a share!". It's easy to say that, but making it actually happen is the real deal. When someone sign on the dotted line and hand over real $. It's a much more accurate test of value.
> So, in your example, before the round you actually owned $500 and after the round you own $50.
That's not how the math works. In the prior round people didn't know the value of the company. Maybe it was worth $100M, maybe it was worth zero. The expected value (weighted average probability of all scenarios) of your stake in the company was worth $10 per the parent
It's always good to take credit if you're reasonably sure you can make a return greater than the cost. When money is flowing easily, and therefore the cost is low, there is a good chance that you can make a great enough return to outweigh the cost.
Money is cheap right now, so it makes sense to get a lot of it while you can so you can ride out the next downturn when money will be expensive.
Yes, if you have a good plan on using the money. Keep in mind that these are investments, not loans. So they don't have to be paid back. The investor is taking the risk that they believe you can do something with the money.
When I say that "money is cheap" I mean in dilution cost, not interest. Although to be fair a lot of corporate debt can be written off without destroying to company so it's not a bad option for bigger companies to issue debt either.
It can be. See Ford in the mid-2000s under Alan Mulally--that was his play and it was spectacularly successful compared to the counterexamples at GM and Chrysler.
It does if the implied valuation is higher. And it signals to the market that you're worth $x which is greater than your prior valuation (assuming one exists), which anchors the price a buyer will pay for your business
I wonder if anyone has statistics on how often a new funding round increases valuation enough to offset dilution. I suspect that's generally the case, but I may be biased by the fact that funding rounds I hear about are more likely to be the successful ones.
