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A founders’ guide to unicorn creation: how liquidation preferences in M & A transactions affect start-up valuation
... Instead, the contribution is intended to be automatically converted into share capital in the event of future financing rounds, at favorable conversion rates. 69 The fact that this financing technique has been found only in LLCs and not in joint-stock companies might be due to the statistical irrelevance of joint-stock companies in our large sample or to the fact that this form of company is usually not 62 Bartlett (2016), p 128. 63 See Sect. 6.3 below. ...
... 105, or 72 percent) provide a 90 See n. 64 above. 91 Bartlett (2016), p 129, text and footnote 6 ('An investor receiving such "participating" preferred stock thus avoids the need to choose between receiving a fixed liquidation preference and converting into common stock', with the specification that if the 'VC investor holds participating preferred stock with a cap on participation, an acquisition of the company will again force the VC investor to choose between holding onto its participating preferred stock or converting it into common stock'). For a similar assessment, , pp 85-87 (conversion rights, as opposed to automatic conversion, are not very useful in the case of participating preferred shares, showing also the inconsistency of some claims made by the economic literature). ...
... 85 These two solutions are envisioned inAgstner et al. (2020), p 422.86 Fried and Ganor (2006), p 967 et seq.;Bratton (2002), p 891 et seq.; for a critical assessment with regard to the viability of the valuation-for-preference theory,Bartlett III (2016), p 124 ('offering up enhanced liquidation preferences is likely to be a self-defeating strategy for a founder seeking to push a VC to a unicorn valuation'). 87 For this terminology,Bartlett (1995), p 302; on conflicting fiduciary duties faced by the VC-affiliated board of directors,Bian et al. (2022), p 1 et seq.;Sanga and Talley (2020), p 1 et seq.; in the case law,Manti Holdings, LLC v. ...
This is the first European study to conduct an extensive empirical research of startup charters. Our aim is to test whether the significant reforms of the law on the Italian società a responsabilità limitata (the GmbH -type limited liability company) were successful in making Italian corporate law more amicable towards startups and venture capital contracting techniques. We explain why, in the Italian context, charters provide significant information on financing deals, and we analyse more than 5000 charters of Italian startups. We find almost 200 charters that reflect the features predicted by the financial contracting theory, albeit with some significant variations in comparison to the US experience. The main one is that convertible preferred shares are not used. We report the large use of (non-convertible) participating preferred shares but also the increasing adoption of preferred shares that are functionally equivalent to US convertible non-participating preferred shares. The absence of convertibility mechanisms also explains the different structure of antidilution clauses in the Italian market. Hybrids are used to provide SAFE- and KISS-like contractual solutions. Co-sale clauses (tag-along and drag-along) are widespread and also highly standardized. US-like vesting schemes are equally observed. Some of the peculiarities we report depend on Italian law idiosyncrasies that are mainly the product of doctrinal constructions. However, corporate practice is pushing the envelope in its efforts to adapt Italian charters to startuppers’ and investors’ needs. From this standpoint, the Italian reforms look, though not completely, successful. Startup law appears to be transforming the European corporate law tradition.
... Especially unicorns with a valuation around one billion USD tend to sell stock with preferred liquidation rights to overcome the one billion USD valuation threshold for publicity reasons. But by selling stocks with preferred liquidation rights, the implicit and risk-adjusted valuation should be lower and probably in certain cases below one billion USD (Bartlett 2016). ...
The number of ventures with a market value of one billion USD or more has considerably increased during the last decade. Driven by new technologies and business models, these ventures became an integral part of our daily life. Particularly, the number of unicorns based in China and other regions outside the US raised during recent years whereas the phenomenon was initially limited to the US region. Existing research has mainly focused on descriptive approaches to examine the rise of these ventures but lacks knowledge on the drivers of this phenomenon. We address these research gaps and investigate the underlying factors that foster the emergence of such high-valued ventures. Our results present several economic environmental as well as investor-related factors that impact the likelihood for a venture to achieve a market valuation of more than one billion USD. Subsequently, we derive theoretical and practical implications that may foster the future emergence of new high-valued ventures, covering regulatory, investor- and venture-specific aspects.
... Shareholders are faced with the problem of relying and having full faith in the information that unicorns provide regarding their financial performance. 540 Scholars have found that unicorns' publicly disclosed valuations have a tendency to be unreliable, particularly as VCs receive particular and special benefits related to their preferred stock holdings and unavailable to common stock holders. 541 Furthering this concern is that unicorns sell their shares, in some instances, without any disclosure. ...
This paper aims to answer one question -- whether a standard one-size fits all model, the “Holy-Grail,” of corporate governance exists? Through its analysis of the various corporate governance structures, mechanisms and theories over the last two centuries, this paper concludes that neither governance framework is superior or inferior to the other. That each corporate structure is imperfect and speaks directly to the needs of the market it served and is a product of its time. However, specific laudable elements of one governance framework shed light on the shortcomings of the others. More importantly, the shortcomings of each period, though served as antecedents for the development of new governance mechanisms, they each share a common failing that is best encapsulated by Oscar Wilde’s statement: “Be yourself. Everyone else is already taken.” Rather than looking to their contemporaries and mirroring their actions, firms should evaluate their own equilibrium of agency costs, economies of scale and the balance of power between shareholders, and managers as they design and implement a governance that articulates their values, takes prophylactic measures to prevent fraud and compliance issues, while simultaneously maximizing the firm’s potential value as both a nexus of contracts and a social institution.
The economy, free enterprise, and capital markets, serve as a backbone to our society, and, hence, make the corporations through which their businesses transact significantly important. Moreover, as corporations serve as the entity through which our society depends upon for everything from agricultural, pharmaceutical, and transportation needs to legal, sociocultural and financial products, it is unequivocally imperative “that the activities of corporations are under constant, vigorous and public scrutiny because those activities are crucial to the economic well-being of society.” Thus, examining and reevaluating the balance of power and the specific structure that constitutes a given corporation’s governance is of paramount interest as Adam Smith explains “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Smith’s statement captures the essence of the problems that plagues corporations – the varied interests within the corporate web spanning from its shareholders, directors, managers and employees to its non-shareholder stakeholders, such as its consumer-base, the natural environment and the greater society.
These varied and differing interests create misalignment, inefficiencies, and impedes maximization of a given firm’s value. As a result, over the last two centuries, a series of state and federal laws and regulations, as well as judiciary case law, emerged as reactionary and responsive actions to give constructive meaning to firms as an entity, to limit directors’ and managers’ overarching and potential imperial-like over shareholders and to require fiduciary duties of loyalty and disclosure to safeguard firm owners through monitoring their agents’ actions. As markets and economies grew and collapsed, and as scholars examined firms and prescriptively critiqued their behavior, the corporate governance landscape evolved in the last two centuries, directly in response to the needs of their time. Though the driving forces propelling developments and evolutions, and deregulation and increased regulation varied in the last two hundred years and were, particularly, in response to the socioeconomic temperament of a given time period, an examination of corporate governance over the last two centuries is insightful in determining whether there exists a “Holy-Grail one size fits all” corporate governance structure that is best suited to effectively and efficiently maximize the value of any given firm irrespective of differences in industry.
This paper examines the corporate governance landscape and the various frameworks that developed from the late nineteenth century through the early twenty-first century. This inquiry is divided in three sections: (1) beginning in the late nineteenth century to the close of the twentieth century; (2) the ‘traditional firm’ of the twenty-first century; and (3) the large technology firms and their unicorn counterparts of the twenty-first century. The selection these consecutive periods is not designed to execute a survey. Instead, by examining these periods discretely with the specific firms and respective governance structures that emerged, an analysis can effectively be made by juxtaposing different types of firms – the robber barons of the nineteenth century, their managerial-era predecessors of the twentieth century, the turn of the twenty-first century’s age of data firms such as GAFA, and the rise of the unicorns in this current decade – each of which differ markedly. Hence, this selection begets the question of: whether the corporate governance of unicorns and big data companies are worth modeling over their predecessors? The first three sections – (I) Corporate Governance From its Early Roots to the Twentieth Century, (II) Governance in the Early 2000s: A Time of Transitions, and (III) The Next Chapter in the Corporate Governance Narrative: Startups and Unicorns – will each discuss and analyze that period’s corporate governance frameworks and their evolutions, as well as the critical scholarship, legislation, regulation and case law that supported such structures or responded to their deficiencies. Each section begins by setting the stage of that period’s dominant corporate governance paradigm as well as the major economic and legal shifts that marked a change in structure. This is followed by an analysis of the dominant paradigms, that then briefly concludes on their achievements and deficiencies.
Purpose: The aim of this paper is to determine whether football clubs are valued according to financial parameters, as in other profit-seeking investments, or depending on the subjective preference of the buyers, in situations where buyers seek emotional rewards or a status symbol.
Design: This work analyses a unique data set of the prices of actual transactions of shares from clubs in the big European leagues from 2001 until 2019. A theoretical model is presented introducing financial, sporting, and localisation variables to study their influence in market value.
Findings: We have found that the valuation of football clubs in acquisitions is influenced by financial parameters, as in other profit seeking investments, and does not depend on the subjective preference of the buyers.
Practical implications: Our findings show the end of the alignment of interests between new football owners and fans or current organisers of competitions, due to the preferences of the new investor profit-seekers of an American model of sport.
Research contributions: The ownership of football clubs in the big leagues has changed dramatically in the last years. For the first time, to the best of our knowledge, the present paper demonstrates the opportunity of analysing the valuations of the football industry with actual data from the transactions.
Keywords: sport economics, football, valuation, firm ownership, sport management, investment
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