United States: The Terms Behind The Unicorn Valuations

Last Updated: May 8 2015

Article by Barry Kramer, Michael Patrick and Nicole Harper, Harper Power Law Firm


There has been much discussion about the high valuations of venture backed companies, and especially the "unicorns", companies with a valuation of a billion dollars or higher. However, as the investors in these companies generally receive preferred stock, rather than the common stock that is issued in IPOs and held by public company investors, unicorn valuations are not directly comparable to public company valuations.

To better understand unicorn valuations we analyzed the terms of 37 US based venture backed companies that raised money at valuations of $1 billion or more in the 12 month period ending March 31, 2015.

The average valuation of the companies we analyzed was $4.4 billion, the median valuation was $1.6 billion, the average percentage increase per share from the prior financing round was 180%, and the median percentage increase per share from the prior financing round was 100%. Of these financings, approximately 25% were led by traditional VC investors and approximately 75% were led by investors who were not traditional VCs (e.g., mutual funds, hedge funds, sovereign wealth or corporate investors).


The highlights of our results are as follows:

  • Investors received terms that provided a fair amount of downside protection for their investment, especially in the event of an acquisition, but relatively few upside benefits.
  • These terms could result in a divergence in interest between early and late stage investors at the time of a liquidity event.
  • A significant percentage of the highest valuation unicorns had dual class common stock which provided founders/management and in some cases other shareholders with super voting rights.
  • Attaining a unicorn valuation appears to be a goal of promising companies raising money, as 35% of the companies we analyzed had valuations in the $1-1.1 billion dollar range, indicating that the companies may have negotiated specifically to attain the unicorn level.


Downside Protections

There are various different preferred stock terms that investors can use to protect their investment in the event the company's value declines. These terms include:

  • liquidation preferences (which require that an investor receives its investment back prior to common investors receiving any proceeds, and if the investor has a senior liquidation preference, it receives its investment back not only before common investors, but also before other series of preferred stock);
  • IPO conversion provisions (which provide, among other things, that an investor's preferred stock will only convert to common stock in an IPO, if the IPO is at a certain valuation, usually at least what the investor paid, or providing that if the IPO is at less than a certain valuation, the investor gets additional shares). Note that the conversion of outstanding preferred stock into common stock is basically a requirement to go public; and
  • anti-dilution adjustments (which retroactively reduce the price of the stock an investor purchased if the company raises funds in a non-IPO future financing at a lower price).

Our analysis showed that the forgoing terms were used in the following percentage of unicorn financings:

Acquisition Protection Terms
Liquidation protection over common stock – 100%
Senior liquidation protection over other series of preferred stock - 19%

IPO Protection Terms
Minimum IPO price must be no less than unicorn round investment price – 16%
Payment of additional shares if IPO price below unicorn round investment price – 14%

Future Financing Protection Terms
Weighted average – 100%
Ratchet – 0%

*** Analysis: Investors in unicorn financings have significantly more downside protection than public company common stock investors. These protections are especially strong in the event of an acquisition. For example, CB Insights reported that the 10 highest valued unicorns had an aggregate valuation of $122 billion and an aggregate invested capital of $12 billion. Since 100% of the unicorn financings had a liquidation preference, valuations of these companies could fall on average by 90% before the unicorn investors would suffer a loss of their investment, and they could withstand an even greater decline if they had a senior liquidation preference over other series of preferred stock.

IPO protections for investors were less strong. This is probably in part because investors assume that an IPO transaction in and of itself is an indication that a company is doing well, although a unicorn company could be doing well but still go public at a price per share less than the price paid by the unicorn investor. Approximately 30% of unicorn investors had significant protection against a down round IPO.

Future financing protection was present in the form of weighted average anti dilution protection in all rounds. This provides some, but very limited, protection.

Upside Benefits

There are also various terms that unicorn investors can use to enhance their upside potential in a company. These provisions include:

  • cumulative dividends
  • liquidation participation (which provides that after an investor receives its money back in an acquisition, the investor then gets to participate with common shareholders in receiving the remaining proceeds).
  • multiple liquidation preference (which provides that an investor gets more than its initial investment back before common shareholders (or possibly other preferred shareholders) receive any funds in a liquidation).
  • IPO auto conversion threshold that is above the price paid by the investor, which assures the unicorn investor a profit on an IPO

Our analysis showed that these terms were infrequently used, as follows:

Cumulative dividends – 0%
Participating preferred – 5%
Multiple liquidation preference – 3%
IPO auto convert above per share price paid by investor – 11%

***Analysis: A result of the significant downside protections and relatively limited upside benefits provided to unicorn investors is that there could be a large range of valuations at which a unicorn could exit, especially by acquisition, in which the unicorn investor would be indifferent because it will not affect its return. For example, if an investor invested in a unicorn at a post money valuation of $10 billion and the company had $1 billion of total investment after such investment, and the investor had the typical non-participating liquidation preference, then the investor would be indifferent if the company was sold at any valuation between $1 billion and $10 billion. This could result in the investor having different strategic interests than investors who have invested at lower valuations. For example the founders and early investors might welcome an opportunity to sell the company at $8 billion, but in that case the unicorn investor might prefer that the company not sell, but rather try to build more value above $10 billion, so that the unicorn investor makes a gain on its investment.

This difference of interests is not unusual in venture capital, but the range of values at which late stage investors are indifferent is much larger than in the past when overall valuations were lower. One way to address this situation is to let founders/management/early investors sell some shares in a secondary transaction to reduce their interest in an early exit. But in most cases, if there is a difference of interest on when to sell the company, the founders/management and early investors will have the voting power to prevail.

Super Voting Stock

22% of unicorn companies had a dual class common stock structure, which provided for one class of common stock to have significantly more voting power than the other class of common stock.

Of these companies, 37.5% provided super voting common only to founders and/or management, 25% provided such common stock to founders/management and early stage investors, and 37.5% provided such common stock to all pre IPO investors.

The companies that had dual class common stock structures were concentrated at higher unicorn valuations, with 70% of the top 10 highest valuations having such structure.

*** Analysis: The concentration of dual class super voting common stock provisions in the highest valuation unicorn financings likely reflects the expectation that these companies are most likely to go public, that insiders have a desire to maintain significant voting control after the IPO, and that these companies have the negotiating leverage to obtain these provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
30 Nov 2017, Conference, San Francisco, United States

The 2017 agenda addresses significant pending legislative and regulatory changes along with our annual substantive updates.

5 Dec 2017, Webinar, California, United States

This highly interactive colloquium will provide a deep understanding and practical advice regarding major e-discovery challenges facing organizations today.

6 Dec 2017, Seminar, California, United States

Network and be seen as an information security thought leader. “The Exchange” colloquium is designed for senior business executives and security practitioners from both the public and private sector.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.