example: as an employee you own 10% of the company. The 10% is worth $10. After company raises a 100M round and dilution has occurred, you own 1% of the company, but that 1% is now worth $50
who is being treated unfairly? I don't quite understand
Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit. This means that while the employee private equity may increase in value, the employees get pennies on the dollar during the exit because the majority of the payout goes to the investors who inflated the price to begin with.
It gets worse when employees pay taxes on the equity at the inflated valuation, but there are ways claw that back later.
But you don't have the counterfactual to know what the company would have exited for without the ridiculous valuation. Probably a lower number.
The difference is the expected value of income that the employees are given in equity, which is especially nefarious.
This is not a thing that happens in the vast majority of circumstances. Preferences are for downside protection not a way for investors to actually make money. No one invests with the goal of making use of them.
Investors who play in this arena are not stupid: https://angel.co/blog/liquidation-preference-your-equity-cou...
https://www.crunchbase.com/organization/good-technology
Per your link, they sold for $425 million.
The investors lost money.
That is not the outcome they were hoping for. However, their preferences did provide them downside protection which was, as I noted, their purpose.
1) Good Technology was valued at $1.1 Billion.
2) The investors lost money, but the employees lost much more.
-> This is the problem with unicorns.
You've completely missed the point.
That's not how the math works. In the prior round people didn't know the value of the company. Maybe it was worth $100M, maybe it was worth zero. The expected value (weighted average probability of all scenarios) of your stake in the company was worth $10 per the parent
Numeric value is determined at time of sale. Without a sale, the object has no "value". It might be useful to you in some way, but it's value is 0 unless you can sell it. There is no such thing as "underlying value"
example: I have a normal orange that I bought for $5 at the supermarket. The orange's underlying value is $5. If I sell it to my friend for $10, the value of the orange is now $10. If no one is willing to buy it, its value is $0.
The same thing happens when you raise a new round. When you raise a new round, you've made a "sale": someone paid money for it. That exchange of money/shares is what determines value.
To use your orange metaphor, while it is true that if no one else wants the orange the value of the orange is $0, I don't have to sell it to have a good idea of what the price of an orange is. For example, if there are people offering to buy my orange for $8 and I know that a typical bid-ask spread for fruits is %50 of the bid and most transactions occur at midpoint I can be relatively certain that the orange is worth $10 despite no transaction occurring and there being no market for oranges (if there is a generic orange market you have access to then the entire point becomes moot since you can just take the market price).
"People offering to buy" is key.
It's very easy for a founder to tell employees "hey I met with a VC yesterday, and they were interested in investing at $x a share!". It's easy to say that, but making it actually happen is the real deal. When someone sign on the dotted line and hand over real $. It's a much more accurate test of value.