The Prime Unicorn Index Announces Quarterly Reconstitution

Year to Date Return on the Index is 25.16% A record 15 private companies joined the Index, while five left.

The Prime Unicorn Index, the first index to track the share price performance of privately-funded U.S. companies, announced today its quarterly reconstitution. The index, which gives equal-weighting to its constituents, has added a record 15 companies that qualify as Unicorns or Approaching Unicorns. Five companies have left the index – two have had successful IPOs and three were acquired.

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Silicon Valley Venture Capital Survey – Fourth Quarter 2017

 

By Cynthia Clarfield Hess, Mark A. Leahy and Khang Tran

View the full report.

Background
This report analyzes the terms of 190 venture financings closed in the fourth quarter of 2017 by companies headquartered in Silicon Valley.

Overview of Results
Valuation Results Remain Strong
Valuation results continued to be strong in Q4 2017, but the percentage price increases declined moderately compared to the prior quarter, following three consecutive quarters of increases.

Internet/Digital Media Scores Highest Valuation Results
The internet/digital media industry recorded the strongest valuation results in Q4 2017 compared to the other industries, with an average price increase of 179% and a median price increase of 51%, both up from the prior quarter.

Valuation Results Down for Series D Financings
Series D financings recorded the weakest valuation results in Q4 2017 compared to the other financing rounds, with the highest percentage of down rounds and the lowest average and median price increases of all the financing rounds.

 

FULL REPORT

 

View the original post by Fenwick & West LLP

Venture Capital Fundamentals: Three Basic Rules-Dilution, Dilution, Dilution

Written by: Joseph W. Bartlett, VC Experts Founder

Take a sample of 100 venture-backed companies successful enough to undertake an initial public offering. In a high percentage of the transactions, the prospectus discloses that the earliest stage investors (founders and angels) wind up with close to trivial equity percentages and thus, puny returns on their investment in the company. One would think that these investors are entitled to the lushest rewards because of the high degree of risk accompanying their early stage investments, cash and/or sweat. The problem, however, is dilution. Most early stage companies go through multiple rounds of private financing, and one or more of those rounds is often a “down round,” which entails a disappointing price per share and, therefore, significant dilution to those shareholders who are not in a position to play in the later rounds.

The problem of dilution is serious because it has a dampening impact on angels and others who are thinking of financing, joining or otherwise contributing to a start up. Estimates put the relationship of angel capital to early stageinvestments by professional VCs at five dollars of angel capital going into promising start ups for every one dollar of VC investment. But if angels are increasingly discouraged by the threat of dilution, particularly since the meltdown, we don’t have much of an industry; there is no one to start the engines. [1]

There are a variety of fixes for the dilution issue open to founders and angels.

  • Make sure you enjoy pre-emptive rights, the ability to participate in any and all future rounds of financing and to protect your percentage interest. Pre-emptive rights can be, of course, lost if you don’t have the money as founders and angels often do not to play in subsequent rounds.
  • Try to get a negative covenant; this gives you a veto over the subsequent round and particularly the pricing of the terms.

You don’t want to kill the goose of course, meaning veto a dilutive round and then once the Company fails for lack of cash; however, a veto right at least will you the opportunity to make sure the round is fairly prices; that the board casts a wide enough net so that the round is not an inside trade; meaning that the investors in control of the Company, go over in the corner and do a deal with themselves. Those rounds can be highly toxic to the existing shareholders (cram downs, as they are called). Finally, if you don’t have cash try to upgrade your percentage interest with derivative securitiesoptions and warrants (a warrant is another word for option, they are the same security, a call on the Company’s stock at a fixed price but options are if the call was labeled if an employee is the beneficiary is the holder and the warrants are for everyone else). If you are the founding entrepreneur therefore, make sure you are a participant in the employee option program. Often the founder will start off with a sufficient significant percentage of the Company’s equity that she doesn’t feel necessary to declare herself eligible for employee options. This is a major mistake. In fact, I am likely to suggest founder client consider a piece of financial engineering I claim to have invented; the issuance of warrants in favor of the founders and angels at significant step-ups from the current valuation, which I call ‘up-the-ladder warrants.’ To see how the structure works, consider the following example:

Let’s say the angels are investing $1,000,000 in 100,000 shares ($10 per share) at a pre-money valuation of $3 million, resulting in a post money valuation of $4 million ($1 million going into the Company). We suggest angels also obtain 100 percent warrant coverage, meaning they can acquire three warrants, totaling calls on another 100,000 shares of the Company’s stock; however not to scare off subsequent venture capitalists or, more importantly, cause the VCs to require the warrants be eliminated as a price for future investments. The exercise prices of the warrants will be based on pre-money valuations which are relatively heroic win/win valuations, if you like. For the sake of argument, the exercise prices could be set at $30, $40 and $50 a share (33,333 shares in each case).

Let’s use a hypothetical example to see how this regime could work. Since the angels have invested $1 million at a post-money valuation of $4 million, they therefore own 25 percent of the Company–100,000 shares out of a total of 400,000 outstanding. The three warrants, as stated, are each a call on 33,333 shares. Subsequent down rounds raise $2,000,000 and dilute the angels’ share of the Company’s equity from 25 percent to, say, 5 percent–their 100,000 shares now represent 5 percent of 2,000,000 shares (cost basis still $10 per share) and the down round investors own 1,900,000 shares at a cost of $1.05 per share. Assume only one down round. Finally, assume the Company climbs out of the cellar and is sold for $100 million in cash, or $50 per share.

Absent ‘up-the-ladder warrants,’ the proceeds to the angels would be $5 million–not a bad return (5x) on their investment but, nonetheless, arguably inconsistent with the fact that the angels took the earliest risk. The ‘up-the-ladder warrants‘ add to the angels’ ultimate outcome (and we assume cashless exercise or an SAR technique, and ignore the effect of taxes) as follows: 33,333 warrants at $20/share are in the money by $666,660 and 33,333 warrants at $10 a share are in the money by $333,330. While the number of shares to be sold rises to 2,066,666, let’s say, for sake of simplicity, the buy-out price per share remains at $50, meaning the angels get another $999,999–call it $1 million. The angels’ total gross returns have increased 20 percent while the VCs’ returns have stayed at $95,000,000. Even if the $1,000,000 to the angels comes out of the VC’s share, that’s trivial slippage … a gross payback of 47.5 times their investment, vs. 47 times. If the company sells for just $30 a share, the angels get nothing and the VCs still make out.


 

Q1 2018 Prime Unicorn Index Reconstitution Report

Post by Lagniappe Labs LLC

The Prime Unicorn Index added nine constituents and dropped one in its quarterly reconstitution, for a total of 93 index components as of Q1 2018.

The additions to the Index are: Urban Compass, AvidXchange, Discord, Bolt Threads, Proterra, WellTok, Flatiron Health, Health Catalyst, and Pindrop Security.

The deletion from the Index is: Forescout Technologies

As more high-performing companies defer or eliminate plans to go public, the demand for information and investment exposure to this growing portion of the American economy has soared. The Q1 2018 Prime Unicorn Index Reconstitution Report provides more information on the new nine constituents and how they compare against the Index.

Screenshot 2018-01-29 14.05.08

Q4 2017 Prime Unicorn Index Trend Report from Lagniappe Labs, LLC

The Q4 2017 Prime Unicorn Index Trend Report is an analysis of 85 components that comprised the Index in the last quarter of 2017. The Index includes both unicorns and “approaching unicorns,” which are private companies with a valuation of at least $500 million. Valuations for individual components are determined by an analysis of various documents, such as: Certificates of Incorporation, Employee-Plan Exemption Notices, Limited-Offering Exemption Notices, Annual Report filings, Form Ds, bankruptcy filings, and many more sources. Utilizing all sources, we can extract key Deal Terms, such as: Round of Financing, Round Direction, Liquidation Preference, Liquidation Multiple and Dividend Rate. The report analyzes the different trending deal terms for a more granular picture of the capitalization structures surrounding the Q4 2017 Index components.

The Prime Unicorn Index Announces Quarterly Reconstitution

The Prime Unicorn Index, the first index to track the share price performance of privately-funded U.S. companies, today announces its quarterly reconstitution. The index, which gives equal-weighting to its constituents, has added nine companies that qualify as Unicorns or Approaching Unicorns to its previous list of 85 privately funded companies.

The companies added to the index include AvidXchange Inc., Proterra Inc., WellTok Inc., Health Catalyst Inc., Flatiron Health Inc., Urban Compass Inc., Pindrop Security Inc., Bolt Threads Inc. and Discord Inc. The reconstitution was effective at market close on Jan. 17, 2018.

With investor appetite for companies that have not yet made their shares available via IPO soaring, companies that have surpassed $1 billion valuations are given Unicorn status, while companies that have achieved $500 million valuations are classified as Approaching Unicorns in the Prime Unicorn Index. Reconstitution of the index relies heavily on Lagniappe Labs’ proprietary research and difficult-to-source, objective data to determine true valuations of privately-funded companies in a measurable and verifiable way.

“The Prime Unicorn Index serves to benchmark the performance of private companies in line with how the S&P 500 Index tracks publicly traded companies,” noted Barrett. “We are excited to be the primary resource for investors and help them better understand how to assign the true valuation of private companies as they look to go public.”

The new constituents join the index’s well-known companies, including Uber, WeWork and AirBnB. The newly added components are market leaders in technology, software and healthcare and all have excellent investor bases.  

“Taken as a whole the Prime Unicorn Index achieved a positive return of 9.3% in 2017 and provides a unique way for institutional investors to access the private markets, whether they want to go long or short,” added Barrett.

For more information, please visit PrimeUnicornIndex.com.

About The Prime Unicorn Index

The Prime Unicorn Index is an equally-weighted price return index that measures the share price performance of U.S. private companies valued at $500 million or more. The Index was launched by Lagniappe Labs and Level ETF Ventures. The index uses Lagniappe Labs’ proprietary research and difficult-to-source, objective data to determine true valuations for privately-funded companies in a measurable and verifiable way.

About Lagniappe Labs

Lagniappe Labs uses state, federal and difficult-to-acquire corporate filings in a fully configurable platform that allows users to analyze the value of privately held companies. The technology provides tools and data to build financial models on specific sectors, people, industries, investors and more. Lagniappe Labs federates disparate sources of information to drive objective analysis on private company investments.

Lagniappe Labs replaces subjective and error-prone ‘wiki’ data with actual corporate documents and data so investors and potential investors in privately held companies have true and accurate information to drive decision making.