投资组合估值白皮书

Portfolio Valuation Whitepaper Assessing the Worth of LiquidationPreferences Amid Market Declines How do prior liquidation preference rights hold upin down-round financing events? Authors: Steven Nebb,Managing Director, Kroll LLC,Navodit Mittal,Director, Kroll Global Solutions LLP The bull market run for VC investments over the 2010 to 2021 period saw the rise of theunicorns, expanded growth and significant capital allocated to the venture sector.Coming out of COVID, this environment has shifted dramatically. Over the past decade,liquidation preferences (LPs) and related rights were certainly still considered, but theirimportance quickly faded as growth and value increased dramatically. At this point, itmay be worth revisiting the preference terms and their impact on the estimation of fairvalue in a more challenging environment. In 2024, many startups raised funds at flat orlower valuations (down rounds) compared to theelevated levels seen in 2021, regardless of theirstage or size. However, investors are now favoringcertain sectors like AI, healthcare and renewables,as well as leaner startups with clear paths toprofitability, over those focused solely on growth.Since 2023, there has been an increase in insiderand bridge rounds of financing due to higher costof capital and macroeconomic uncertainty. Facingchallenges in raising new capital, companies withimminent liquidity issues are compelled to securefunds through down rounds, which negativelyimpact the equity stakes of founders, employees,and previous investors. However, some foundersand company owners are attempting to avoid therecognition of a declining headline value throughvarious financing strategies: –Qualified events or contingentownership coverage–Participation rights–Better than one conversion ratios •Issuance of SAFEs (Simple Agreements forFuture Equity) with or without caps•More aggressive, tranched financings withembedded contingencies for capital calls All of these strategies are dilutive and typicallyindicate a decrease in value; however, from a basicviewpoint, these strategies enable the reportedheadline values or original issue prices to remainhigh while obscuring the true impact they have onthe value of a company. Downside Protection forEquity Investors •Use of convertible securities•Specialized terms–Senior and increasing preferences–Material cumulative dividends–Minimum MOIC (Multiple of Invested Capital)or IRR (Internal Rate of Return) terms LPs help mitigate financial risk for new investors,making high-risk ventures more appealing. Theyserve as a crucial negotiating tool, enabling investorsto secure better terms during future funding roundsand allocation of value at certain exit scenarios. LPscan influence a startup’s valuation, as some For junior and common shareholders, having seniorinvestors with LPs can provide a buffer againstdownside risk. These investors are more likely tosupport the company during difficult periods. If thecompany succeeds and grows, the overall value canincrease, benefiting all shareholders, including juniorand common shareholders. They may becomfortable with senior LPs for new investors whoinvest at higher valuations compared to previousrounds. High or favorable LPs can sometimesreduce the company’s valuation by prioritizingpreferred investor returns over those of commonshareholders. This can dilute the value of commonequity, impacting the returns founders andemployees receive during an exit, especially inlow-value scenarios such as asset sales ordistressed mergers. investors may demand higher returns, potentiallylowering the overall valuation. High LPs can deternew investors since they guarantee higher returnsfor current investors during a liquidation event. LPcan skew the perceived value of the company. Forexample, a startup with a $250 million valuation,$100 million in preferred stock and a 2.0x LP mightend up being worth much less to commonshareholders in a liquidation scenario. A significant amount of LP can create “flat spots,”where certain investors become indifferent to thecompany’s final sale price across variousoutcomes. Therefore, negotiating fair andequitable LPs is essential for investors andfounders. Both parties can consider several factorswhile negotiating LP: •Stage of development (early stage vs.mature stage)•Expected capital needs of the company to getto exit or profitability•Market conditions•Valuation of the company•Exit strategy In companies with complex capital structures, LPsdetermine the order of payouts during a liquidityevent and can significantly influence the distributionof proceeds, which, in general, disproportionatelybenefits preferred stockholders relative to theirpercentage ownership in the company.Understanding the impact of different types of LPson a company’s value is crucial, as they can affectfinancial outcomes during exit events. In tough economic times, securing investment—even with senior LPs—can be vital for a company’ssurvival. Without this funding,