In a recent paper, “Squaring Venture Capital Valuations with Reality,” authors Will Gornall and Ilya A. Stebulaev review and consider valuations for a sample of unicorns.  The valuations are on average 49% above fair value largely because such analyses assume that all of a company’s shares have the same price as the most recently issued shares; however, the most recently issued shares have better cash flow and other rights than the prior series of shares.  The study also finds that 53% of unicorns give investors a return guarantee in an IPO, the ability to block an IPO that would not return their investment, and seniority over other series.  Much has been written about unicorns deferring their IPOs because private rounds yield higher valuations, as well as about IPOs coming at a valuation below the immediately preceding private round.  The paper reiterates that these observations gloss over the fundamental contractual differences between common stock and preferred stock, which has a liquidation preference and other rights.

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