A colleague of mine shared the re/code story Here’s One Thing All the Billion-Dollar Unicorns Have in Common. The title intrigued me, so I read the article. My takeaway after reading? It's ponderous how little the writer seems to understand about startup financing or venture capital.
The premise of the article is apparently that it's not surprising for companies to be able to raise money at valuations north of a billion dollars because venture capital rounds include liquidation preference clauses which mean the investors get to have the first money out and have a preferential position should the company be dissolved.
The author states,
What that ultimately means is that the investors are taking on a very little risk when investing in unicorns, because they stand almost no risk of losing their money if the company goes south.
Unfortunately, nothing about that statement is true. While it's true that liquidation preference makes the venture investment preferred shares senior to common shares, they are still subordinate to debt. And in the event of the company "going south", it's doubtful the assets would be worth much in a fire sale or bankruptcy.
It should also be noted that liquidation preference clauses in venture investments are nothing new and not particularly uncommon. They are also not limited to companies with high valuations. Brad Feld wrote a good article on the topic back in 2005.
It's strange that re/code, a publication focused on the technology industry that reports heavily on startups, has so little understanding of how startup finance works.