I feel like the upper management of my company is taking a lot of risk. We are a b2b startup (no consumer facing) at a late stage (series D) and despite growth growth being definitely slower than it used to be, I just heard a rumor that they’re trying to raise more money at a valuation of 50X our current revenues, which is simply insane, our competitors who are public are in the 10X multiple. They are basically setting themselves up for failure. Letting aside for a second the VCs who give money at such crazy terms, why are the execs risking so much rather than trying to sell ship at current valuation, which I think they could? I think by being so “over leveraged” the risk is massive. A couple execs (vp of sales and vp of product) already left. I asked for coffee with them (I was an early employee so I have a good relationship) and they informally confirmed that the company is becoming too risky for them (due to revenues not materializing and CEO chasing higher valuations) and they don’t want to be caught in the middle if things go down for reputation issues.
Did they sprinkle AI into their pitch?
No AI fortunately
Given that they can raise money, why is it a problem to raise at 50X revenue vs 10X revenue? They just raised 5X more money selling the same equity.
Assuming you’re not trolling, it’s a problem because now the company valuation is anchored to the new high, and if they sell for less the common stock holders will be screwed because the investors will exercise their liquidation preferences and will get their original money back no matter what. So, it is more reasonable to raise valuations in check with the realistic growth you are expecting, and 50X is way too much. In other words, if you have a startup that is making 1M a year and I come to you and offer you to give you 10M at 100B valuation, you should run away because it will realistically mean I will wipe out all your gains even if you offer me the same equity.
Damn LinkedIn, your first startup is going to run roughshod over you.
Can you please explain 'how' in the last part. I have little to understanding of these concepts.
It's obviously learned behavior of someone among the investors or founders who has seen this work at some other place. They are driving this.
"They are setting themselves up for failure". No, they are setting up themselves for retirement. They are setting you up for failure.
Best I know upper management has common options just like everybody else. Are you trying to say that even if the company gets sold for less than the valuation and common stocks goes to zero, they’ll still get large bonuses out of it? To be fair, a couple execs (vp of sales and vp of product) already left. I asked coffee with them (I was an early employee so I have a good relationship) and they confirmed that the company is becoming too risky (due to revenues not materializing and high valuation) and they don’t want to be caught in the middle if things go down. So your point is debatable to some degree.
I assumed it's not common but some form of preferred.