In a day and age of valuations as score card there are in some cases extraordinary efforts being made to forcefully make certain milestone valuations happen (100m, 500m, 1bn etc).
The right way to make a high(er) valuation happen is of course to have someone just pay that price with fair and appropriate growth / later stage financing terms. Lots of companies can pull that off – even to the point where new later stage investors are just getting common stock.
But that is not what is going on in many cases. This is what’s going on:
New later stage investor: “Hey so I don’t think your company is worth $500m; maybe $200m – BUT if we can agree that I can get a 2x liquidation preference on my $50m and a full ratchet I would be ok with it. You should be fine with it because you told me next round will be $1bn+ – so we both win. You get your $500m valuation now, you don’t get a lot of dilution and I know I’ll make a safe 2-3x.”
Basically this means the new later stage investor will still make a 2x return if the company is sold as low as for $100m (!). And