Unicorn

How the unicorn label works

Aileen Lee introduced the term in a TechCrunch article published on 2 November 2013 titled Welcome To The Unicorn Club. Her definition was narrower than the one in common use today: United States based software companies started since 2003 and valued at over 1 billion dollars by public or private market investors. She found 39 of them, roughly 0.07 percent of the venture-backed consumer and enterprise software companies in her sample, about four created per year across the decade she studied.

Two things in that original definition get lost. First, it included public companies; the modern usage almost always means a private company, because the point of the label now is that the valuation has not been tested by a public market. Second, it was scoped to software and to a founding date, which is what made the 0.07 percent figure meaningful. Numbers quoted today come from different universes and are not comparable to Lee's.

The valuation that triggers the label is almost always a post-money valuation from the most recent priced round:

Post-money valuation = price per share in the round × fully diluted shares outstanding after the round

This is a mechanical calculation, and it treats every share as if it were worth the price the newest investor paid for preferred stock. It is not a valuation in the sense an appraiser would use the word. The newest investor bought a security with rights nobody else holds, and the arithmetic then extends that price to founders, employees, and earlier investors who hold weaker securities.

Will Gornall and Ilya Strebulaev quantified the gap in Squaring Venture Capital Valuations with Reality, published in the Journal of Financial Economics. Applying a valuation model to the contractual terms in the charters of 135 United States unicorns, they found reported post-money valuations averaged 48 percent above fair value, with 14 companies more than 100 percent above. They documented the terms that create the gap: IPO return guarantees in 15 percent of the companies, vetoes over a down-IPO in 24 percent, and seniority over all other investors in 30 percent. Common shares, which carry none of these protections, were 56 percent overvalued on their estimates. Adjusting for the terms, 65 of the 135 companies lost unicorn status.

The practical consequence: the 1 billion dollar threshold measures the headline price of the last round, not the value of the company, and certainly not what a common shareholder owns.

Variants of the label follow the same convention at higher thresholds. A decacorn is a private company valued at 10 billion dollars or more. A hectocorn, or centicorn, is one valued at 100 billion dollars or more. None of these are defined by any regulator or standard-setter.

Worked example

Suppose a company raises a Series D. These figures are hypothetical.

Step one, the headline. The round prices at 22.00 dollars per share and the company has 50 million shares outstanding on a fully diluted basis after the round. 22.00 times 50 million equals 1.1 billion dollars post-money. The company is a unicorn by the standard convention.

Step two, look at what the newest investor bought. The Series D investors put in 150 million dollars for 6.82 million shares. Their terms include a 1x liquidation preference senior to all earlier preferred, and a guarantee that if the company goes public at a price below the Series D price, they receive additional shares to make them whole to their purchase price.

Step three, test the headline against a modest outcome. Suppose the company is acquired for 700 million dollars. The Series D takes its 150 million preference first. The earlier preferred classes hold a further 260 million of preference. That leaves 290 million dollars for common and for any preferred that converts, split across roughly 30 million common and option shares, about 9.67 dollars per share.

Step four, compare. The headline said every share was worth 22.00 dollars. In a 700 million dollar exit, which is a good outcome by most standards, common receives 9.67 dollars, 44 percent of the headline. The 1.1 billion dollar number was never a statement about the common stock.

Step five, the employee view. An employee holding 20,000 vested options with a 3.00 dollar strike sees 133,400 dollars of gross value in that exit, not the 380,000 dollars implied by the headline share price.

Where it shows up

The charter is where the terms that inflate the headline actually live. A certificate of incorporation on the NVCA model pattern contains the liquidation preference, the conversion rights, the anti-dilution adjustment, and any senior ranking among preferred series. Gornall and Strebulaev built their estimates by reading these documents, which is the reason their conclusions differ from the press coverage.

The term sheet is where they are agreed. The liquidation preference, seniority, participation, and anti-dilution sections of a term sheet on the NVCA model pattern determine most of the distance between the headline valuation and what common stock is worth.

Fund reporting is where the number becomes a performance figure. Under fair value accounting a manager marks a position to fair value rather than to the last round price, and ILPA's reporting templates set out a standard format for reporting unrealized value alongside contributions and distributions, which is what TVPI and RVPI are computed from. A held position in a unicorn contributes to RVPI, not DPI, until it is sold.

Registration statements are where the label meets a market. A company's S-1 shows the historical preferred prices and the IPO price side by side, and the gap between them is public.

Data provider trackers are where most counts come from. They are compiled from reported round prices and are subject to the same limitation, plus a reporting lag, because a private company is under no obligation to announce that a valuation has fallen.

Common mistakes

• Reading a 1 billion dollar valuation as a market price. It is the price one investor paid for one class of preferred stock, multiplied across all shares.
• Multiplying the headline share price by an option grant to estimate what a job is worth. The preference stack sits ahead of common, and Gornall and Strebulaev estimated common shares in their sample were 56 percent overvalued by that method.
• Comparing modern unicorn counts to Lee's 39. Her sample was United States software companies founded since 2003 and included public companies.
• Assuming the status is permanent. A private valuation is only observed when a new round prices, so a company can trade well below the threshold for a long time before any number changes in public.
• Treating a higher valuation as a better outcome for founders. A high price often comes with structure, and structure is paid for out of the common stock.
• Using the label as evidence of business quality. It measures capital raised at a price, not revenue, margin, or cash generation.

Related terms

The unicorn threshold is measured on post-money valuation, which is inflated by the liquidation preference and other rights attached to preferred stock. A company that cannot grow into its headline price faces a down round, and holders of common sometimes reach liquidity before an exit through a secondary sale. For the venture capital funds that own these positions, the mark contributes to unrealized value until an exit converts it to cash.

Frequently asked questions

What is a unicorn startup?

A privately held company valued at 1 billion dollars or more, based on the post-money valuation implied by its most recent priced financing round. Aileen Lee coined the term in TechCrunch in November 2013 for United States software companies founded since 2003 valued above 1 billion dollars by public or private investors, and found 39 at the time.

Who coined the term unicorn and why?

Aileen Lee, in Welcome To The Unicorn Club, published by TechCrunch on 2 November 2013. She chose the animal because such companies were statistically rare: about 0.07 percent of the venture-backed software companies in her sample, or roughly 1 in 1,538, which she described as more than 100 times harder than getting into Stanford.

How is a unicorn valuation calculated?

Price per share in the most recent priced round multiplied by fully diluted shares outstanding after the round. Every share is treated as equal in value to the newest preferred share, which is why the resulting figure is a convention rather than an appraisal.

Are unicorn valuations accurate?

Gornall and Strebulaev, studying 135 United States unicorns using the terms in their legal filings, estimated that reported post-money valuations averaged 48 percent above fair value, and that adjusting for terms such as IPO return guarantees, down-IPO vetoes, and seniority, 65 of the 135 fell below the 1 billion dollar threshold. The headline number systematically overstates what the company is worth, and overstates common stock by more.

What is a decacorn or a hectocorn?

A decacorn is a private company valued at 10 billion dollars or more; a hectocorn, sometimes called a centicorn, is one valued at 100 billion dollars or more. These are informal extensions of the same convention and carry the same measurement problems.

Can a company stop being a unicorn?

Yes, and it happens more often than public counts suggest. Valuations are only revised in public when a new round prices, a secondary trade is reported, or a fund discloses a mark. A company can sit well below the threshold for years without any announcement, and a down round or a sale below 1 billion dollars settles the question after the fact.