Study of 116 unicorns founded after 1994 finds that about half used complex stock mechanics to raise valuation, devaluing employee and early shareholder stakes
Julie Verhage / Bloomberg :
Context & Ripple Effects
The paper lands mid-arc in a debate that had been building since 2015, when a [[a:829089|survey of 37 unicorns found liquidation preferences protecting investors in every single funding deal]] and follow-up work showed senior preferences jumping into 42% of Q4 2015 rounds. What those studies established term-by-term, this one quantifies at the cap-table level: across 116 post-1994 unicorns, roughly half raised their headline valuations through complex stock mechanics that simultaneously cheapened the common stock held by employees and early shareholders.
That reframes the earlier dispute over whether unicorns were overvalued — including the Stratechery argument that the group was likely undervalued — because it shows the number itself was partly an artifact of deal structure. It also explains why mutual funds began writing down their unicorn holdings once they marked to the terms late investors actually received.
First-order effects
- Employees and early shareholders at about half of the 116 unicorns studied hold common stock worth materially less than the company's headline valuation implies, since preferred terms carve value away from them first.
- Late-stage investors in those companies effectively bought in below the advertised price, meaning press-release valuations no longer describe what anyone actually paid per share.
Second-order effects
- Mutual funds holding unicorn stakes face pressure to mark positions to the structured terms rather than the headline round price, extending the write-down cycle already visible in 2016.
- Founders raising new rounds now compete against a documented playbook: investors can point to peers who extracted preferences and ratchets, making richer protective terms the default ask.
Third-order effects
- If structured terms stay standard, the 'unicorn' label splits into two numbers — the headline valuation and the common-share value — forcing secondary markets, recruiters, and eventual IPO pricing to discount the public figure.
- The pattern points toward a durable private valuation–liquidity gap: with a record 1,200 VC-backed unicorns still awaiting exit years later, headline marks can persist untested far longer than the underlying economics justify.
The trend: Private-company valuations are increasingly set by the structured terms late investors negotiate rather than the price of common stock, widening the gap between headline marks and what employees' equity is actually worth.