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.

Snap Judgment: Unicorns Under Pressure and Addressing Risks of Private Lawsuits

 

 

By: Joshua M. NewvilleWilliam Dalsen and Alexandra V. Bargoot of Proskauer

The recent IPOs of Snap, Inc. and Blue Apron indicate that while the IPO pipeline continues to flow, there may be a cautionary tale for “unicorns” – venture-backed companies with estimated valuations in excess of $1 billion.

After Snap went public in March, it posted a $2.2 billion loss in its first quarter, yielding a 20% same-day drop in stock price that erased much of the company’s gains since its IPO. A snapshot of Snap’s stock price shows the obvious risks faced by late-stage investors in unicorns.  High valuations are not a guarantee of continued success, particularly where historical performance and profitability are lacking.  Although one commentator recently asked: “Are Blue Apron and Snap the worst IPOs ever?”, there is plenty of time for those stock prices to recover, especially in the months after their insider lockup periods expire.

Less well-known is how those risks can create conflicts that lead to litigation in the private fund space. The unicorn creates a dilemma for the private fund backing it.  On the one hand, an exit through a public offering is desirable as demonstrating cash-on-cash return is generally better than maintaining an illiquid holding, particularly when the company is facing the potential for down round funding to survive.  On the other hand, going public puts the unicorn’s financials in public view, and employees and private funds risk losing big if the company cannot sustain its predicted value.

Ultimately, a choppy IPO outlook for unicorns will lead to tightening of markets. As more unicorns linger and fall into distress, some will fail, leading to litigation.  Overly optimistic valuations lead to inflated expectations, especially those of employees expecting a payout and investors expecting gains.  Below are some types of disputes that can arise.

Employee claims: Employees paid in common stock may sue in the event of a dissolution or bad sale ahead of a public offering.  As in the case of former unicorn Good Technology, a bad sale may involve a payout on the common stock that amounts to only a fraction of its estimated value.  Employees of Good Technology (who held common shares) filed claims asserting that the company’s board breached its fiduciary duties by approving the sale.  They alleged that the board (whose members represented funds that owned preferred shares) favored the preferred over common shareholders.  While the case has been slow to progress, its outcome will inform the market whether such suits will provide viable recourse when employee shareholders believe their interests have been disadvantaged.

SEC Scrutiny: As we’ve previously noted, valuation-related regulatory risks increase as the time lengthens between purchase and exit. The SEC’s exam and enforcement staff have been focused on valuation of privately held companies for years. Further, the SEC sees itself as a protector of investors, even when those investors are employees of a private startup.   We are likely to see a disclosure case against a pre-IPO issuer relating to Rule 701 under the Securities Act.  That rule requires disclosure in certain circumstances of detailed financial information to employees in connection with certain stock or option grants.  This would lead to a spillover effect for funds that have supported those companies.

Claims arising in an acquisition: If the company is fortunate enough to reach some liquidity in a private sale, the acquiring company may pursue litigation against the board or other investors. The buyer may later allege fraudulent inducement and breach of contract on the grounds that the company and its investors misrepresented the company’s value.  In addition, investors can often break even in a merger by holding preferred shares with liquidation preferences.  However, like employees, investors still may sue the board or the company to try to recover a better return on their investment.

Fund LP/GP disputes: Unicorns are no different than other portfolio companies, in that when they fail, there may be disputes between a fund’s GP and its LPs. Those claims may vary.  For example, the fund’s designee on a failed unicorn’s board of directors will typically owe fiduciary duties to both the portfolio company and the LPs.  An LP may allege that the board representative favored the interests of the company over the interests of the LPs, or failed to adequately address or disclose concerns raised to the board level.  Furthermore, LPs may allege that the fund manager failed to address the potential for conflicts between the adviser and the funds.

While unicorns can generate extraordinary returns for early investors, they may also carry increased litigation risk even when they are successful. In addition, as more unicorns linger and fail to achieve successful exits, there is a higher likelihood that investors or employees will seek to recoup losses through litigation.  Fund managers should keep in mind the potential for these conflicts before a unicorn stumbles.  Addressing these relationships at early stages of the investment can help minimize litigation risk.

Startups, Late-Stage Valuations, And Bull | TechCrunch

unicorn

Are massive valuations just a marketing ploy? Are VCs letting these late stage companies pick the valuation as long as the company agrees to their terms? These unicorns become media darlings because of their astronomical valuations; it seems like lipstick on a pig. Bill Gurley is right in this blog post from TechCrunch, there is a lack of due diligence and the cycle will continue to produce the overvalued company, they will go through the “financial root canal” with their S-1, and we will all wait for the next unicorn to dance across our screens.

Read the full article: Startups, Late-Stage Valuations, And Bull | TechCrunch.