In "Squaring Venture Capital Valuations with Reality," authors Will Gornall and Ilya Strebulaev developed a valuation model for venture capital-backed companies that relies on terms of financing rounds that were gleaned from public filings. Using these reported valuations, the authors then calculate values for all share classes for each of the 135 US unicorns in the study sample set. In doing so, the valuation of shares of common stock is adjusted down to reflect the fact that reported valuations relate to preferred stock and the holders of preferred stock receive significant contractual and economic benefits that are not shared by the common stock. The authors point to certain valuation practices that may lead to incorrect conclusions, such as the post-money valuation approach often used by VC funds. Also, the authors note that often in arriving at valuations, the valuation may be based on the value of the most recently issued series. Usually the most recently issued series of preferred stock is senior to all previously issued and outstanding series of preferred stock, making prior series less valuable by comparison, but instead many models would ascribe the per share valuation of that senior security to every share of the other series. Using their valuation model, the authors find that 65 of the 135 unicorns lose their status as unicorns when considered based on fair value. The authors note that a lack of information regarding the differing contractual terms associated with the outstanding series of stock contributes to the overvaluation. The lack of transparency may be problematic as private secondary markets continue to grow, and as ownership of stock in privately held companies becomes dispersed. The full report can be accessed here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2955455
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