> A unicorn that is doing very well would not agree to a 2X liquidation preference at late stage.
Debt isn't always worse than equity. It is not a last resort source of funding. For example, if you are bullish, it is better to take debt than equity. It means you have to share less of the upside. If you believe you're about to experience a 10x increase in value, it's great to take money with a 2x liquidation preference and a 3x liquidation cap! You get to keep the remaining 3.33x for yourself. And startup founders are not usually the pessimistic kind...
I think late stage debt-like investments are copying the leveraged buy-out model from places like Bain Capital. They do many of these deals on the east coast: buy a company, load it up with debt, go for aggressive growth. Here is one example: http://www.forbes.com/sites/tomiogeron/2013/01/15/sevone-lan...
well, sure, but we are talking about late stage. A late stage company expecting a 10X increase in value without going public? from the perspective of the investors, they gave up a nearly worthless option on the upside, while protecting their downside quite a bit, while preserving the positive optics for the company and employees
Because they are a different class of investor, with a more conservative outlook. T-Rowe Price doesn't believe in the 10x. It just wants the guaranteed 2x. This is where the "investors are looking for a fixed-income replacement" part of Sam's thesis comes into play.
perhaps, but T-Rowe Price needs to match a benchmark. So if benchmark rises 10x and they only get 2x, they will suffer quite a bit. More likely, they expect this company to go public way before hitting the 3x mark.
> A unicorn that is doing very well would not agree to a 2X liquidation preference at late stage.
Debt isn't always worse than equity. It is not a last resort source of funding. For example, if you are bullish, it is better to take debt than equity. It means you have to share less of the upside. If you believe you're about to experience a 10x increase in value, it's great to take money with a 2x liquidation preference and a 3x liquidation cap! You get to keep the remaining 3.33x for yourself. And startup founders are not usually the pessimistic kind...
I think late stage debt-like investments are copying the leveraged buy-out model from places like Bain Capital. They do many of these deals on the east coast: buy a company, load it up with debt, go for aggressive growth. Here is one example: http://www.forbes.com/sites/tomiogeron/2013/01/15/sevone-lan...