New calculator sheds light on high US unicorn prices
(Reuters) – The common shares of many high-flying venture capital-backed startups are worth less than headlines would have some people believe, and an online calculator that two finance professors debuted on Wednesday can now quantify this difference.
Ilya Strebulaev, a professor at the Stanford Graduate School of Business, and Will Gornall, an assistant professor of finance at the University of British Columbia, have previously shown that aggregate valuation numbers do not reflect how favorable terms traded by large investors may reduce the value of common shares.
They built a tool that calculates the fair value of these stocks and options and launched it at evaluation.vc.
For example, food delivery startup DoorDash raised its latest round at $189.70 per share, and the calculator put the fair value of a common stock at $169. Impossible Foods’ last round was at $10.60 per share against its fair value share price of $9.24, according to the calculator.
Both companies declined to comment.
The gap arises because large investors, including venture capital funds, are able to demand favorable terms such as a guarantee on their return when the company goes public.
Common stock investors, such as employees who receive stock or options, rarely enjoy similar terms.
A record number of unicorns, startups valued at $1 billion or more, were formed in 2019, often using their lofty valuations to attract talent, attract attention or build partnerships.
When venture capital funds invest in fast-growing companies like the scooter company Bird or Airbnb, these numbers are derived from simple calculations: the most recent price paid for a slice of the company is applied to the company as a whole to get a total. Evaluation.
The calculator’s fair value data would be useful for start-up employees to decide whether to leave a company and ditch stock options, or at what price to sell their shares in an opaque secondary market for unlisted shares.
To build the calculator, professors retrieved public documents on more than 130 startups, including incorporation documents.
Strebulaev and Gornall developed models to calculate the impact on common stock of provisions such as those that guarantee a return on investment to certain investors or give investors veto power over initial public offerings.
Strebulaev said his team will continue to update and expand the calculator with the goal of bringing more transparency to the startup world.
(This story refiles to remove superfluous letter in third paragraph)
Reporting by Jane Lanhee Lee; Editing by Greg Mitchell and Cynthia Osterman