The Elusive Unicorn The rare startup company that wins the jackpot in terms of valuation or exit is called a unicorn. This could include a $250,000 exit or an IPO. In Silicon Valley, unicorns should be worth at least $1 billion – companies like Uber, Airbnb and Snapchat.
Scenario B: One VC Round. The Angels grow the company more than 3X and it does a VC investment round of $4 million on a post-money valuation of $10 million. The Angels do not invest their pro rata share and are diluted down from 25% to 15% of the company. The company goes on to a successful exit with no further financing required (a one-and-done from the VC’s perspective). As shown in the chart, a down-round exit valuation of less than $5 million may wipe out the Angels entirely if the VC has a liquidation preference. If the VC has an anti-dilution clause, the down round would trigger additional shares to the VC, which would further dilute the Angels. Scenario C: Series B Round. The company valuation grows to $30 million and raises another $15 million for 33% of the company. The Angels now own 10% of the company. In the event of a future exit of less than $20 million, the Angel investors will almost certainly receive no return. Scenario D: Pre-IPO Series C Round. The company grows to $100 million, and perhaps there is no acquisition in sight. To prepare for going public, the company raises a final round of financing to cover legal fees, audit fees, filing requirements, roadshow,.... $40 million is raised and the Angels are diluted down from 10% to 6.67% (note: perhaps the Angels obtain some liquidity in this round due to a secondary offering). As can be seen, these additional rounds of financing can substantially dilute the Angel investor and reduce the overall multiples. When you also factor in the time-effect of money, these large multiples may have lower IRR than a smaller multiple taking place earlier (see section 6.1). 6.3 Secondary Offering, Dividend, Royalty, or Buy-Back Secondary funding markets are becoming more common. These are late-stage funding rounds (e.g., Series B or C) that include secondary stock purchases from founders and/ or earlier-round investors. This allows founders and Angels to sell some of their shares in advance of a final liquidity event. If the company has grown to be cash-flow positive, but with no acquisition or exit in sight, investors can get their money out of the company through a variety of other methods. These methods would normally be written into the original investment term sheet and embodied in the Unanimous Shareholder Agreement.
How to Achieve Good Returns
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