Public-Private Gulf Puts Startup Valuations in the Spotlight

Fenwick startup and venture capital practice co-chair Mark Leahy talked to Law360 about private startup valuation negotiations and reasons that public market valuations do not always line up.

Leahy told Law360 that investors consider multiple factors in negotiating the valuation of a startup for a financing. These factors include the perceived quality of a startup's management team, its financial metrics and product development milestones. The level of investor excitement around a certain industry can also play a role, he noted.

"Sometimes certain sectors have a lot of investor enthusiasm, and investors experience some FOMO—fear of missing out. There may be a little of that that drives up valuations of companies in those spaces," Leahy said.

Leahy also noted that investors purchasing preferred stock negotiate to receive liquidation preferences (that is, the right in a sale of company transaction to be repaid their investment before holders of common stock receive any sale proceeds) and sometimes—often in later rounds—seniority over earlier investors for the payout of their liquidation preferences.

Law360 cited Fenwick’s Silicon Valley Venture Capital Survey – Fourth Quarter 2019, which showed that senior liquidation preferences in 2018 and 2019 appeared in roughly 25% financings.

The full article is available on Law360 (subscription required).