In a recent article, I highlighted new academic research arguing that many VC-backed unicorns are overvalued by an average of 50% when one accounts for distinctions between common and preferred shares and "riders" granted to late-stage investors. This is based on the findings of a paper co-authored by Will Gornall at the University of British Columbia and Ilya A. Strebulaev at Stanford University.
The TL;DR? Late-series post-money valuations assign the per-share price of "deluxe" late-stage rounds to "vanilla" early-stage shares. In a positive exit—say, a successful IPO—this assumption is valid. But a poor exit will result in late-stage investors enjoying a relatively larger payout, suggesting an optionality value that needs to be accounted for.
Gornall and Strebulaev revealed that many large unicorns are carrying price tags billions over their fair value. And 15 unicorns in the US are carrying valuations more than 100% above fair value.
To explore the 10 unicorns with the biggest discrepancies in value, click through this interactive graphic:
Who are the victims when companies are overvalued? According to the authors, they're startup employees with junior share class holdings unaware that those big-time late series valuations may not fully apply to them should things take a negative turn.
"Some companies have made very generous promises to some of their investors," Gornall told PitchBook. "If the employees of those companies are looking at inflated post-money valuations and expecting a large option payout, they are very likely to be disappointed."