It seems churlish to keep pointing this out, but (assuming the investment is consistent with the typical Silicon Valley practice), it is just not true that this investment, or any participant, has now valued the company at $3.5 billion.
Stripe has sold the investors a new round of senior preferred shares (again, making assumptions). These shares carry various bells and whistles whose terms we don't know -- but probably include some preference at an unknown rate.
The seniority and the bells and whistles make these shares particularly valuable, compared with less-senior preferred shares, not to mention common shares, not to mention something like an authorized stock option that will be issued in-the-money at some future time.
The way you would get $3.5 billion (again, making the same assumptions) is by imputing this per-share value to all of the equity units, as well as things like authorized-but-not-yet-issued stock options.
That is not sensible. The investors in this round have not acted in a way that suggests they believe the less-privileged shares are worth as much as these new shares, and neither has anybody else. There is no basis for imputing the same value to all equity units (and authorized options, irrespective of strike price).
Here is a hypothetical cap table that is consistent with public reports: http://qr.ae/lc0ry
Some of your assumptions are off (e.g. our liquidation preferences are 1x non-participating pari passu; there are no seniority games), but I really enjoyed your Bayesian vs frequentist statistics lecture at 6.945 back in the day!
Thanks, Patrick! (And thanks for posting Mosh on here and giving us a kick in the butt to really release it...) If Stripe just has one class of preferred stock, you're right that my assumptions are off, and I guess then it would be reasonable to impute the value of the newly-issued preferred shares to all the preferred shares. I would still disagree with imputing it to the common, especially since you presumably have your own appraisal of the common at a different price for tax purposes.
Do you think there's a practical path to getting some more realistic numbers in these announcements? Does it matter? It seems like the people possibly being misled by these "TechCrunch valuations" are the press (which is enthusiastic anyway and loves to report the biggest number that can be attributed to somebody) and prospective/current employees (which could be a lot more serious, since people use these valuations to evaluate their own equity packages).
I think this is mostly a pedantic point for a late stage private convertible preferred.
While private convertible preferreds typically have a dividend stream, conversion option (typically at spot) and liquidation preference (1x and presumably no participation feature in this case), they are theoretically more valuable than common. However, since there is no public market for the common, hedging that option wouldn't be efficient (if feasible at all) so I don't think the valuation really reflects that additional value (if at all). Investors develop a valuation view based on the metrics they would use for common (growth, fundamentals, perhaps some real option value, etc.) and invest based on that. All the preferred features are in the doc to provide some protection in the downside, which I don't think is much of a consideration in case of Stripe. You can see this pricing dynamic in S-1 filings of a few precedents (Twitter comes to mind) where founders were able to tender some of their common in the later rounds at the same valuation as preferred[1].
On the other hand, you are spot on when it comes to a public security (i.e. post-IPO convertible preferred, mostly capital/ratings instrument and quite uncommon in tech) - you would definitely bake-in the option value and dividend stream into the security valuation which would result in some conversion premium for the company and say 5-10 points in theoretical value above the par for investors. The difference is that primary buyers of the public convertible preferred security would be hedge funds who can short the common and effectively monetize the option value embedded in the security.
If anything, the way I would look at this is that any credible bid for Stripe would probably have to be in 4-5x of that valuation.
[1] See pgs. 139 (bottom, 2011 Third-Party Tender Offer) and II-3 (top) of Twitter S-1 (http://1.usa.gov/1cEqy0J) for difference of ~1%, likely due to fees, etc.
Technically, things are only worth what people will pay for them. Accordingly, you could also argue that the value of the company cannot be known unless and until it is wholly acquired. But these kinds of arguments are somewhat pedantic. They have built a tremendous amount of value. Whether it's $1 billion or $3.5 billion, it's more value than virtually everyone upvoting your comment has built.
Exactly! I would actually argue that if anyone wanted to buy the whole company tomorrow, they would probably have to pay at least 4-5x premium to today's valuation (purely illustrative/gut figure, I have no inside knowledge here aside from what's publicly known).
Stripe is simply one of the SV's greatest hits and has a ton of upside and real option value. Any investor who got in today understands that and would have no good reason to sell for anything less than a really nice premium to where they got in.
Simply put, in the current market their IPO would literally fly off the shelf, they would get great institutional public investors and have a ton of good growth financing options available to them down the road (follow-ons, converts, heck even straight debt soon). Every investor in the deal understands that very well. Having said that, the investor roster doesn't look like a pre-IPO round (I suspect they would have likes of Templeton otherwise), so they will probably grow the company quite a bit more before they hit the public markets (needless to say - a smart move).
At any rate, I completely agree that pointing out that the preferred is more valuable than common is red herring. Theoretically yes - but in this case and in the case of every great late-stage private company, I would argue that the price of the common >= price of the latest preferred round.
I agree with all of what you've said. It's also worth noting that this is just 2% of the company. One person offering to pay cash for 2% of a company with seniority preferences is very different than someone offering cash for the entire thing.
After reading through the quora article, I agree that different tranches may have different terms. However, if investors are buying 70M shares at $1 each, it implies that they believe a share of the company is worth that much. If the company has 3.5B shares, that's an implied valuation of $3.5B. In that sense, the investment does value the company at $3.5B. Whether that valuation (or a higher or lower one) is realized through a liquidity event is a different matter, and if/ when that happens, the valuation would be specific to that point in time.
> However, if investors are buying 70M shares at $1 each, it implies that they believe a share of the company is worth that much.
Well, you need to unpack what "worth" means in that above sentence. If you're using some kind of probability distribution over expected future outcomes (say, using some present value future discounted cashflow model with a probability distribution of possible future cashflows), you can see that there are all these possible future worlds that Stripe can inhabit. In some of these, Stripe is making lots of money, and so the stock is "worth" a lot. In some of these, Stripe is crashing and burning. In those worlds, common stock is worthless. But the preferred stock isn't as badly off due to the 1x (or higher) liquidation preference, and the other terms. So the expected value of the preferred stock across all these worlds is higher than that of common, and imputing its value over common doesn't quite make sense.
Agreed, that's why I've always thought of it as an implied valuation. Investors are going into it expecting upside, and the terms allow them to have a floor (regardless of what happens with common/ prior rounds), but I don't think they would make the investment if they felt an acquisition/ IPO/ other liquidity event would value each share of the company at less than what they paid for it. I don't think its unreasonable to use this to get to an implied total valuation.
In my experience Stripe has very poor customer service. Hopefully they spend some of this money in that department.
Trying to talk back and forth through e-mail because they won't give me a number to call about sales trying to get a lower rate because my volume of sales is greater than $80k+ monthly, waiting 24+ hours on average for a reply and even 72+ hours on one occasion, finally gave up on them and went with another payment processing company. This happened over the past month. Kind of disappointed.
I'm very sorry about that! The support team has expanded a lot this year; we're working on it. Feel free to email me directly if I can ever help -- patrick@stripe.com.
I've spoken to some Stripes about it, getting on top of IRC is definitely something they're working on and some hints of that are showing with the new developer support position.
I'm always happy to help out, Stripe's a fun and easy platform to develop upon, and its always fun to see what other people are building, see how they're using Stripe, etc. I definitely think I've learned as much helping as I've taught.
I will take an invite to the infamous Taco Tuesday though :p
markin and wsmoak have both done exceptional work over the past six months or so. It would be awesome to have both of them on Stripe's payroll if that's a thing they want.
I wish I could throw all of my karma at this. I would really love more support in IRC, especially since I think fully owning some fanatical support for a developer-focused company can only be a good move. It'd also end up meaning a much better product.
Thanks for reaching out. Unfortunately, it's a seasonal business so the bulk of our sales comes in November and December and needed to get something besides PayPal checkout implemented before the Thanksgiving rush. It was just dumbfounding how long it took sales@stripe.com to reply to my e-mails.
The last e-mail we sent was November 25th at 5:50pm and didn't get a reply until November 30th at 5:03pm with "Thanks for clarifying, and I apologize for a delayed response on my end." ..by that time we already found an alternative, got it set up and installed in less than an hour.
It's called PayStand and don't have any issues so far. Not sure if you're familiar. It works for what we need, a little higher of a rate we were looking to pay (we don't push the transaction fees to our customers which is an option of theirs), but had to implement something in time for the holidays.
Fascinating. Was completely expecting you to say Braintree. So they look a little like a blended monthly fee and transaction fees with the benefit/incentive being to help you drive as many transactions as you can via non CC options so you aren't paying 2.69% and 30 cents etc.
FWIW I generally have had excellent customer service experiences with Stripe. Often receiving responses within an hour after sending them at 2 am.
In fact, once an employee out of the blue sent me a mockup showing me how I might use a whole new feature, completely integrated into my sites js and html structure.
I was e-mailing sales@stripe so maybe that is a different department than their regular customer service. Sorry I did not clarify. I'm sure they're doing a lot of things right, I just had a bad personal experience.
Not my experience at all. Haven't tried recently but previously they've always been willing to help and even pretty complex technical queries have been answered fast. I didn't need phone support though.
Please don't submit articles which are behind paywalls. Usually ft.com, wsj.com can be accessed freely by using Google Webcache. Here is the link to the cached article :
Please don't submit articles which are behind paywalls.
I'm pretty sure if that's what the moderators wanted, they could just block wsj.com and ft.com directly. Personally I would rather see more payed content because I think it tends to be of higher quality, especially when it comes to business/finance journalism.
The issue is the same information is available from other sources without a paywall and the difference in information or insight is negligible for articles like this.
Hopefully they take some of that money and try processing payments other than credit cards. I really wanted to use them, but I have old school customers who want to pay me with a physical check sometimes.
Good for Stripe. Many companies are receiving frothy valuations in this environment. IMO a small fraction of them have even a remote possibility of growing into those valuations. Stripe is one of those few.
Disrupting the payments industry, with its labyrinth of regulatory issues, entrenched gatekeepers and competitors, and massive risk management issues, is a Herculian task. Pc and the rest of his team at Stripe have successfully confronted all of these challenges, and I can't wait to see where things go from here.
Would anyone else stuck with a bunch of subscriptions on Authorize.net like to see Stripe come up with an easy way to transition over? That would be incredible.
We still haven't built most of the stuff we want to build. We're not available in most countries; there are countless payment instruments we don't support; there's a lot of functionality we'd like to add. We want to do this as quickly as possible, which is expensive, and we assume that every round we raise might be our last ever.
That said, we've generally erred towards raising less rather than more -- most companies raise much more money than this in multi-billion valuation dollar rounds.
Patrick ,
Any plan coming to India ? Paypal sucks like hell but we have no other option to bill customers in US.
There are other options available but they big cut in revenue and are slow.
Something like Stripe which allows to bill clients in US, Europe will be very good.
One, they are expecting that it will become difficult to raise money in the future and they are not yet profitable.
That implies they do not see an IPO in their future.
Two, they have been doing this a long time and some of their early investors/execs want a bit of liquidity, and since they haven't (or can't) offer shares to the public, they are using a private markets to provide that liquidity.
Three, they are planning an IPO and some banker convinced them to do "one more round" in order to fill their coffers with some stock outside the stock they could buy as part of the deal to bring them to market. This is a hedge against a 'soft' IPO like Facebook's where the IPO shares available to the bankers were not able to be sold at a profit given the lack of a 'bump.' The hedge would work by them using that stock to sell into the IPO (at say $5B valuation) and thus 'lock in' their payoff without relying on the stock going up at all at the IPO.
IPO certainly not - it's extremely unattractive in the current regulatory regime (death of the IPO [1]). I wonder what their long-term strategy looks like given their margins can't be very high as a front-end for credit card companies.
"PwC also pulled together numbers on 2014’s global tech IPOs in the first nine months, finding that there have been 84 of them, with a total issue size of $43.7 billion. In comparison, there were only 64 last year, totaling $11.4 billion."
Nah, not quite. Public markets are red hot right now. Nasdaq is ~20% above all time high of '99 madness. IPO always was and always will be the best financing option down the road for great companies, Stripe included. Yes, there is a bit more regulation with SoX and such, and yes it's a bit more painful than it used to be back in the days, but some regulatory overhead makes not one iota of difference to a great company. Sure, middle of the road companies in VC's portfolios may not find IPOs as attractive as they were before and will exit through M&A.
As you can see from CEO's post a few above, these guys are nowhere near done, they have their work cut out for them in terms of expansion and accordingly a ton of growth prospects ahead. From that standpoint and because private funding is plentiful and attractive for a company of this profile, I agree - IPO is probably not the best choice at the moment [but you can read above post between the lines that they are heading there]. You see, in an IPO, they would need to sell a bigger chunk of the company to have a decent liquidity in the stock and private markets allow them to "right-size" the rounds. Also, the whole IPO process is a lot of work and bit of a pain and could be distracting from day-to-day business of running a rocket ship.
Yes, quite. Look at this chart[1] and animation [2].
You will find that there are almost no IPO's below 1B$ in the 2010's. What used to be the default option, became: stay private as long as you can. If Stripe is worth 3B$ now, what stops them from going public? Same for AirBnb (13B$ est) and Dropbox(10B$ est).
When looking at those charts, I would disregard the relative density during the IPO madness of '98-00, time when IPO was the default option for companies that should have never been public, to great retail investor fanfare, massive speculation, and ultimately untimely demise. Also, take out outliers (say Facebook and Google), periods of recession, adjust for inflation and all of the sudden, they don't look that much different (perhaps if you also squint a little or close one eye).
These charts only include tech, but there are other industries, too. For example, we had an explosion of IPOs in oil & gas LPs in the last couple of years. How is it not burdensome for a $250mm oil and gas LP to go public but it is for say $1bn tech company?
Make no mistake - there is nothing that would stop any of the companies you listed from going public (and I am pretty sure they will all be public in due time). For now, it is a matter of focus and choice. They all have access to great terms in the private markets. Given access to capital, it has always been more advantageous to stay private for as long as you can. For one, it allows you to focus on metrics that are relevant to your business (say nights booked or payments processed) and growth and not be distracted by GAAP measures and what equity analysts think you should measure. Also, there is no "stock ticker" distraction and a bunch of other reasons.
This all changes a bit when they get into the acquisition mode, as having liquid acquisition currency in form of publicly traded stock helps make bigger and bolder moves. It's also nice to give some liquidity to early employees as well.
While this dynamic may suck for growth oriented retail investors and mutual funds, I think it works well for the companies in question and at the end of the day - that's what really matters.
The private investment market is warm right now, but I think we all know things will cool off eventually. It's better to raise money when you can (if you can use it), then wait and watch the market go cold. Especially when your valuations are rising the way theirs is.
I'm not aware of their financials, but I would imagine a good portion of that 80M is still left from their last round. So with this additional 70M they buy themselves some time with their current burn rate, and more cash on hand for things like acquisitions.
"The company is still sitting on much of what it raised in January, but it wanted to "err on the side of being really well-capitalised" in case markets cool down, Mr Collison said."
Does that mean they believe we are in a bubble? They have lots of data from the transactions, so they should perhaps be able to see if the markets begin to change?
I am building a web app right now and am looking forward to when I can start using Stripe to capture payments. Stripe's design (in terms of both usability and visual appeal) is excellent for a tech company. The API documentation is amazingly easy to read and understand. Also, I love your blog.
I think that valuations right now are the tech VC equivalent of penis size. You can structure a deal such that a valuation becomes pretty much anything you want and it is more about bragging rights then anything else.
Stripe has sold the investors a new round of senior preferred shares (again, making assumptions). These shares carry various bells and whistles whose terms we don't know -- but probably include some preference at an unknown rate.
The seniority and the bells and whistles make these shares particularly valuable, compared with less-senior preferred shares, not to mention common shares, not to mention something like an authorized stock option that will be issued in-the-money at some future time.
The way you would get $3.5 billion (again, making the same assumptions) is by imputing this per-share value to all of the equity units, as well as things like authorized-but-not-yet-issued stock options.
That is not sensible. The investors in this round have not acted in a way that suggests they believe the less-privileged shares are worth as much as these new shares, and neither has anybody else. There is no basis for imputing the same value to all equity units (and authorized options, irrespective of strike price).
Here is a hypothetical cap table that is consistent with public reports: http://qr.ae/lc0ry
Previously on HN: https://news.ycombinator.com/item?id=5798905