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Comment by WisNorCan | Hacker News Reader

Liquidation multiples and preference gives the investor protection when things go bad (and also a kicker when it goes well). Let’s say you put in $100M and have a 2x liquidation multiple at a $4B valuation.

Even if the company falls apart and sells for $100M you still get your money back. If it declines to $200M you get all of that before anyone else.

In reality terms vary substantially. In this case, Doordash had just raised and didn’t need to raise again. Depending on how desperate investors were to get in, they might have gotten clean terms.

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No, I get what a preference is; I'm wondering what the connection between them and valuation is.

I think he's saying that the valuation would be lower if the liquidation preference were lower. This makes sense since a higher liquidation preference reduces the risk of the investment, thus allowing you to grant a higher valuation.

Exactly. This basically makes later stage investments risk-free (nothing is risk free, but you get my point) while pushing all of the risk to the founders and employees.

The press derived a valuation using valuation = price paid X 100/percent equity

Those liquidation preferences mean that investors will pay more for their equity % than they would have without them which inflates the valuation estimates used by the above formula. The basic idea is that not all % equity is the worth the same amount, but it is assumed to when a valuation number is reported.

You're being unusually oblique. It's conventional wisdom that liquidation preference multiples are tied to higher valuation, but you already knew that. Do you disagree with this or have some more interesting theory regarding liquidation preference?

Founders may trade a higher valuations for investor preferences. A Stanford professor of mine who studies VC noted that preferences a few years ago were most prevalent when just pushing startups into unicorn terriory.

Is there a similar interplay between valuation and friendliness to secondary markets for employee shares.

I expect you would see that the value of shares where the stock purchase agreement says the company has the right to block the sale would be lower

My assumption is that you sell a given stock with 1x liquidation preference, and the price of that stock is used to determine the valuation for the company, pretending the price is the same for the common stock as the stock with 1x liquidation?

Higher multiples and preference means that you have less downside and higher upside in the investment -> higher valuation.

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