note: hunting cloud “unicorn” American companies increased by 37 in the past year, much more strongly than any previous year. Behind such a large number of VC chase nature is one of important reason, however, these “unicorn” enterprise financing have one thing in common is that investors demand have “preferred liquidation rights”.
the following for Re/code coverage, the tencent technology translation:
there was a time when the market value above $1 billion young start-ups are collectively referred to as “unicorn”, this is mainly because they are too rare, but now companies seem to have been commonplace.
in the past two weeks, science and technology again witnessed several molding than investments, including HR startup Zenefits completed a $500 million funding, social photo sharing website Pinterest announced to raise $367 million m and Jawbone completed a new round of $300 million in financing.
now, and it is reported that the finishing Uber $2 billion deal, after this round of financing Uber valuations will reach $50 billion (with federal express delivery market value is the same).
so we can not help but ask, what’s the matter with today’s tech investors? How can have so many start-ups can achieve the level of billion-dollar valuations so casual? Those investors are not should be more cautious in their investment, and fully look at risk?
according to the law firm in silicon valley Fenwick & West on March 31 this year by year valuation success of more than $1 billion private companies investment 37 cases were analyzed. Analysis found that as long as these companies can at the time of the negotiation for the investors to give certain guarantee, potential risks and eliminate each other, they become successful financing “unicorn” enterprise is not too difficult. At the same time, Fenwick and West said all of the 37 deal one thing in common, the investor requirements have “preferred Liquidation rights” (Liquidation Preference).
“preferred liquidation rights” is a very important terms, is also a frequently appear in vc agreement and investment contract words. In simple terms, “preferred liquidation rights” determines the company after the liquidation, sell cake how to distribution, how the money priority assigned to hold shares in the company a particular series, and then assigned to the other shareholders. Under this clause, the investors in the investment “unicorn” enterprises when facing the risk has been reduced to the lowest, because even if the investment enterprises face in the future liquidation, the investor can also rely on the clause for the most preferred capital allocation.
of course, this also is not all investment means that the investor can rest easy, because even if the investing enterprise finally smooth IPO, IPO market also may not be able to achieve his valuation. For example, Box, New Relic and Hortonworks after the IPO market value is less than the previous in the private market valuations.
the Fenwick and West says only about 20% of the investors will require “senior preferred liquidation rights” (empresa liquidation preference), they can not only before the ordinary investors access to capital allocation, can even compared to other have “preferred liquidation rights” of the enterprise to obtain more priority in capital allocation.
at the same time, there are more small part (about 16%) of the investor will require companies to when investing in the IPO price shall not be lower than their investment valuation, and another 14% of investors in the enterprise will be requested to IPO valuations are not as good as expected after giving yourself more shares to compensate for the losses.
the U.S. capital market research firm CB Insights, said the top ten “unicorn” enterprise of the total market value of $122 billion, financing a total of $12 billion. In the “preferred liquidation rights” clause, under the action of the enterprise investor only when companies lose up to 90% of the market value is likely to face a loss. And if the “senior preferred liquidation rights” clause, under the action of these investors even in the face of the invested enterprise bigger fails to be able to continue to possess.
in other words, if you signed the terms of the appropriate in investment, investment “unicorn” enterprise is not out of reach.