Hacker News Reader

Hold on a second, you’ve got it wrong. Uber can’t be worth $69B unless the values of all the shares (including the common) add up to $69B.

While sure, selling common at a 30% discount doesn’t necessarily mean the company is worth exactly 30% less. But it is worth less. And 48B is going to be closer to the truth than $69B. Keep in mind the preferreds are giving up a bunch of voting rights here too.

Yes it’s common practice to say the valuation = number of shares * last preferred price, but that’s a convenient fiction.

All that said, $48B (or whatever it may be) is a spectacular success by any measure so I’m not sure what you’re so defensive about.

> Uber can’t be worth $69B unless the values of all the shares (including the common) add up to $69B

This deal is effectively a one-time secondary market for existing investors to sell their stock. If I'm an early employee who has been wearing golden handcuffs for the last eight years, I'd probably accept a lower purchase price than "what they're worth" for the sake of that liquidity. That doesn't reflect upon Uber, or Uber's value. What you're saying might be true if this were a perfect market, but there's externalities in that market (like liquidity) which you're not considering.

> valuation = number of shares times last preferred price, but that’s a convenient fiction.

Fiction as it may be, it's the best instrument the public has to work out the value of a private company. Investors have access to internal numbers, apply due diligence (we assume, since it's their money), and give their best guess as to future returns. That doesn't mean we shouldn't scrutinise the valuation investors accept during a round, but let's not pretend it's not a good marker.

> $48B (or whatever it may be) is a spectacular success by any measure

I doubt existing investors would see it that way, if $21B were wiped off the valuation as reported.

> I’m not sure what you’re so defensive about

My apologies if that's the way it came across. I stand by the criticism I made of the article.

There are some much better models out there for valuation though not quite as simple. Discussion from about 6 months ago https://news.ycombinator.com/item?id=14467869

I see nothing wrong with Bloomberg’s reporting here, as described this would, and should, lower Uber’s valuation but as the other poster points out it isn’t a straight 30% drop.

Good reading. Thanks for the link.

I don't understand how this model can be applied to private companies. It seems to require a cap table, which isn't publicly available until after the company goes public. I understand that in the example given (Square), the analysis calculates the fair market value at the time of their Series E, but it was performed after they went public, with the benefit of the cap table. Can this actually be used by the public in place of a funding valuation?

I agree there are flaws in using that number as a representation of a company's value, and to be clear: I'm not arguing that Uber's $69B valuation is not inflated. I'm arguing that it's inaccurate to report Uber was worth $69B at their last round, and now that SoftBank intends to buy common stock at $48B, Uber are valued at $48B (or some dramatically reduced value in-between). I'm arguing that because SoftBank is not offering $X/share to Uber in exchange for newly issued shares, as is the case in a funding round. This is a transfer of ownership between existing shareholders, and if they can strike a deal in this secondary market then so be it. It doesn't affect Uber in the way a funding round does: they've allowed the deal to go down, but they a) receive none of the money changing hands (that goes to the shareholders who are selling), and b) take no dilution. So it's unfair to say that this sale price is indicative of the company's valuation in the same way a new funding round would be - they are entirely different beasts.

I'll also add that liquidation preference is to reduce risk for investors in case things don't pan out well in a liquidation event. If all goes well and money starts raining from the sky, the payout will be equal for the common stock and preferred stock alike. I can't quite work out how that risk should be accounted for in financial value.

Certainly the preferred shares are worth more, in that one should be prepared to pay more in order to buy them, but I'm not convinced that those disparate buy prices should be incorporated into the value of the company as a whole, since a preferred share and a common share represent the same percent ownership of a company. Perhaps somebody with more understanding than I could comment.

> What you're saying might be true if this were a perfect market, but there's externalities in that market (like liquidity) which you're not considering.

It is absurd to claim that liquidity in Uber shares would result in a 30% discount. A far better explanation is that preferred has rights that add most of that value.

> Fiction as it may be, it's the best instrument the public has to work out the value of a private company.

It's consistently wrong and in the same direction. As such, it's absurd to pretend that it shouldn't be discounted. It's fun for PR and headlines, but that's it.

The real summary here is that you, for whatever reason, are looking at a market transaction and claiming it's not the real market price. That's not just stupid, it's ludicrously arrogant of you.

You are essentially claiming that you are smarter and better informed than the participants in a large financial transaction. The rest of us are simply arguing that maybe we should trust the market a bit more, and be a bit less arrogant than you.

> It is absurd to claim that liquidity in Uber shares would result in a 30% discount.

I'm not sure that it is (as aaavl2821 has commented down the thread, "The liquidity discount that private equity investors use is typically 20-30%"), but more to the point this price is either accepted or rejected by Uber shareholders, not Uber's board. It's the shareholders who will decide if they will take that discount for the sake of liquidity, not some mystical market force you're alluding to. Given many of them are employees who may well just want to get their returns and buy a family home, I think we'll see a lot of them taking the offer up. They're just offloading their risk, and gaining liquidity.

> A far better explanation is that preferred has rights that add most of that value.

I did in fact note that in my original comment. But this only explains why SoftBank is willing to pay different prices for two different classes of shares. It doesn't mean Uber is suddenly worth $21B less because SoftBank was able to strike the deal, which is what I'm arguing against.

> You are essentially claiming that you are smarter and better informed than the participants in a large financial transaction

No, I'm not. I'm claiming that something a media outlet published is a distortion of the deal. They were not participating in the transaction.

We'll have a better discussion if you can leave the ad hominems out in the future.

It all depends on the value of the common stock. If the common stock is worth 30% less than the preferred stock, then the common stock purchase should be zero-sum. If it is worth more, then SoftBank is indeed buying at a bargain and this is analogous to a down round.

Just the fact alone that they’re getting preferred shares at the same price as the last round is a bad sign. Shouldn’t companies be trying to increase valuations at each round?

I didn’t see any defensiveness on the part of the parent poster. Your expressions conveyed more emotion. That said, they added color to your writing and shouldn’t be omitted.

> Shouldn’t companies be trying to increase valuations at each round?

A CEO, who was pushed out [1] over a sexual harassment scandal [2][3] while his company was being sued by fucking Google [4], launched a civil war at the Board level [5]. An outsider had to be brought in to save the peace [6]. Also they got hacked and tried to cover it up [7].

Yes, bigger valuation is generally better than smaller valuation. But sometimes smaller valuation has to do.

[1] https://www.nbcdfw.com/news/business/Uber-CEO-Travis-Kalanic...

[2] https://www.susanjfowler.com/blog/2017/2/19/reflecting-on-on...

[3] https://www.nytimes.com/2017/02/19/business/uber-sexual-hara...

[4] https://www.reuters.com/article/us-alphabet-uber-lawsuit/way...

[5] https://techcrunch.com/2017/08/30/pishevar-says-delaware-cou...

[6] https://www.bloomberg.com/news/articles/2017-09-27/uber-soft...

[7] https://www.engadget.com/2017/11/25/uber-ceo-knew-about-hack...

> Softbank are looking to buy shares at this lower valuation since they are a different class of share to what they would get otherwise; these are common stock (employees will be a major source of stock for the sale)

They are different, but not that different. Also, Softbank are purchasing both common and earlier preferred as part of their tender. All at the same price. Someone tendering their Series F or G preferred stock would sell at a lower price than what they paid (in the case of the latter, over 30% less). The tender is at a discount. It is a down round.

The $1bn at $69bn is simply a cute ploy investors are pulling to avoid having to mark down a big investment.

Disclaimer: I am not a lawyer. This is not legal nor securities advice. Do not buy or sell anything based on this Internet comment.

Just to get the terminology right: A tender is not a "round" - as in "a round (or series) of financing".

> A tender is not a "round"

"Round" is a colloquialism. It just means a financing. (Private equity "rounds", for instance, regularly contain dividend recap and other non-company benefiting components.) This financing was structured specifically to make its nature ambiguous. Debating what to call it is, by design, tedious.

I think you'll find varied opinions in an organization as sprawling as Bloomberg. My favorite writer Matt Levine had a short blurb about this, he's consistently pretty sharp with a dash of humor.

https://www.bloomberg.com/view/articles/2017-11-16/softbank-...

Matt Levine is one of my favorite finance / business writers of all time. Really good grasp on technical financial details as well as the complex incentives that drive markets. He doesn't really get how the tech world works (maybe that's changed; haven't followed him regularly in a year or so) but a lot of fintech people would benefit from reading him

This is probably the 409a valuation of the shares after the last round.

> Softbank are looking to buy shares at this lower valuation since they are a different class of share to what they would get otherwise

That is a distinction without a difference. What matters is the perception of the purchase, which very well may drive Uber's price up or down. The size of the purchase often is the determining factor, as large purchases establish price. This is a similar mechanism as prices returning to earlier levels after a stock split.

If they are buying a combination of preferred at a $69B valuation and common at a 30% lower valuation, it is certainly possible that the overall valuation is a discount to the $69B. Hard to know without seeing detailed terms

I'm sure the liquidation preference (presumably 1x?) is worth something, but is it worth a 5-10-20-30% discount? At Uber's current valuation, the preferred would convert anyway so the liquidation preference would not be relevant

Edit: saw that the total investment is slated to be $10B, with $1B invested at the $69B valuation and the rest presumably in common shares at a 30% discount. It could be true that this does not represent a decrease in valuation, but there is reason to believe that the overall valuation is a step down. Devil in the details

I may be falling for a nice perception play from Uber, but I took this more-or-less at face value: Softbank is buying up a lot of valuable property at the moment, and even though Uber wouldn't be raising again for another 6-12 months, they wanted a piece. This is the mechanism they managed to negotiate.

Early shareholders gain liquidity, Softbank gets cheap stock, and the market gets some bullish signals on Uber in the form of Softbank's backing. From the outside it looks like a pretty good deal. Of course there might be internal panic and I've got it all wrong, but I see some big wins for both parties.

I'm curious about whether a sale like this included full due diligence or if the extra-ordinary nature meant some other standard of accounting was used.

If SoftBank went in with eyes open, this seems business as usual. If they're rushing after the cool kid on the block, then this starts to sound like Theranos 2.0.

SoftBank has been equivocating for months over this deal. It has been in the works long before the current Uber CEO arrived.

They are structuring a deal that is advantageous to themselves, exploiting Benchmark’s desire for an exit so they can pay its investors their returns.

SoftBank is getting extremely cheap debt at the moment, so it makes sense to take advantage of shareholder turmoil to get valuable companies at a discount. With this purchase, SoftBank will have a hand in every significant ride sharing other than Lyft.

> exploiting Benchmark’s desire for an exit

Does that imply that they'll be buying Benchmark's stock, rather than employees'?

> SoftBank is getting extremely cheap debt at the moment

That sounds like some interesting background to the deal, please expand if you have more detail!

SoftBank raised $93B in equity from investors. It also issued about $5B in bonds in July, as well as a large amount of loans from Japanese and East Asian banks (over $25B). The rates are extremely favorable despite the high risk associated with SoftBank's investments.

I'm bullish on SoftBank, but it's indisputable that it's gotten a hell of a deal. The upside for the banks is they get their principal + interest back. The downside for the banks is that they lent the cash at low-risk rates for high-risk assets.

> it has no effect on the current valuation at all

Agreed, this statement was probably a little strong. But certainly it doesn't represent a new $48B valuation as the article suggests.

I suppose I'm objecting to the implied suggestion that Uber is having a down round (a few other commenters have jumped on that) because of the negative public sentiment they are copping at the moment. It's not like Uber needs cash right now, and I really doubt the board would approve a deal which brought their valuation down for the sake of money they don't need.

The headline was certainly provocative and misleading. Could interpret this as a bit of signaling risk with early investors cashing out at a discount, but I don't think that's fair. There isn't really precedent for a $4B+ non m&a or IPO liquidity event for private company shareholders. The liquidity discount that private equity investors use is typically 20-30%, so now that I think about it the 30% discount seems like a logical liquidity discount to anchor on

Interpreting article, I think SB investment would be $6.72B (14% of $48B) plus $1B at $69B valuation. $7.72B total.

btw, $2.94B = $6.72B * (69/48) - $6.72B --> I believe thats SB's nominal gain on paper the minute the deal closes.

Thanks, that's a good catch. nice "built in" gains

Yup, exactly this. The discount in a tender offer is normal. DST also discounted Facebook back when it made a $100m tender to existing employees and shareholders. Look at how TechCrunch reported on that tender offer when it happened:

https://techcrunch.com/2009/07/13/dst-to-buy-up-to-100-milli...

Furthermore, SoftBank has a lot of leverage that DST did not. SoftBank has invested in Ola, Grab, Didi, Nvidia, etc. and threatened to invest in Lyft. It has leverage that allows it to get a better offer than what any other investor could get.

If the last market price is $48B then the market says Uber lost 30% of its value.

Hope no one is using their Uber stock as collateral for loans.

> Hope no one is using their Uber stock as collateral for loans.

Wow. I hope no one is taking Uber stock as collateral.

I would imagine some are. In the valley especially this seems like a good instrument, appropriately risk managed, to offer if it is possible.

You might be right, but who should I believe? Bloomberg™ or commentators on HN?

I don't think an appeal to authority adds much to the conversation here. Mainstream media (and social media, and niche media) should be open to fact-checking by the public now more than ever.

No, it means with the public data available it is impossible to say as a matter of fact what you are claiming.

We don't know the split between preferred and ordinary and we don't know the liquidation terms.

Grandparent was probably joking but I also don't think an appeal to authority adds much to the conversation here because mainstream media doesn't have much authority left.