Headline Valuations: Not Quite What They Seem

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and the author of Kellogg.

And together we are the Metrics Brothers.

And we go together like bluegrass and banjos, Ray.

Oh, Dave, are we going to talk about Billy Strings?

We are. Yes, we are, Ray. He is by far the youngest performer that I follow. Normally in life we only follow performers older than us, right? And Billy Strings is probably around 30, I guess. And yeah, he's fantastic.

Well, I must admit I had never heard of him until you'd lightened me, CAC. But I think I prefer Dust in the Wind by Kansas to Dust in a Baggie. Or maybe I'm just not a bluegrass fan because the last time I listened to someone playing the banjo was in the movie Deliverance.

Well, Ray, we're gonna turn you on to bluegrass again 'cause Billy Strings first is amazing. You should listen to him. I know I mailed you some videos to prep for the episode. But he's grabbing all the headlines these days, and for good reason.

Okay, headlines. So let's get back to the SaaS business because we're here to talk about headline valuations. They're not quite what they seem to be sometimes.

Indeed, headline valuations are not quite what they seem. They can often be quite misleading. But before we do that, Ray, how about we hear a word from our sponsor?

The Metrics Brothers is proudly sponsored by Benchmarket. The B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Grothwright have put the Metrics Brothers podcast on hiatus for remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kelblog and Ray on LinkedIn @rayreich. Thank you so much for listening to the Metrics Brothers podcast. Okay, Dave, so this was a topic that you came up with. I had a chance to learn a heck of a lot. So why don't we start with a little bit about the old school way about valuations versus the new school way? Does that sound like a good place to start?

Sure. Yeah, somewhere around 2010, this all changed. So, so I'm speaking of the '90s and maybe the 2000s, back in the day. When a company raised money, the press release said company raises X dollars from investors. That was the headline, and that X dollars was all primary capital went straight to the balance sheet to help build the company. And what was notably missing was any discussion of valuation. It didn't say company raises X dollars at valuation Y; it just said company raised X dollars, right? And I was online the other day. There's a company I work with in Belgium called TechWolf, and in June I noticed that they raised a $45 million Series B—a nice round, great company—and I was like, oh, that's interesting. Interesting. So first time in a while I've seen a press release that was kind of old school. It had the amount of money raised but not the valuation, and that's the way it used to be. And I think, I think you did some research on this, right? Was it somewhere around 2010 that all changed?

Yeah, well, you know, God, I love ChatGPT. So I kind of said, when did companies start announcing the valuation, not just the amount raised? And the first case of it I found was 2011 with Dropbox. when they raised $250 million in a Series C at $4 billion. But Dave, what I really found was once Cowboy Ventures kind of coined the unicorn term in 2013, then it unleashed, the dam broke. Airbnb announced in 2014, Slack, Stripe, Lyft, Zoom, WeWork, they all started announcing how much the valuation was and the amount that they raised. So it seems like The unicorn phenomenon changed everything.

Yeah, it did. And look, back in the day, it was almost indiscreet to talk about valuation. People didn't do it, and it was actually somewhat unnecessary. If it was a B or C round, you know, they're probably selling around 20% of the company. You can multiply by, by 5 times the amount they raised, and you guess the valuation. But you're right, 2011, that all changed, and we now live in a world where every press release pretty much says company raises X dollars at Y valuation. The media eats it up. The media loves those big Y numbers. People love to talk about unicorns at a billion dollar plus or decacorns, or I think it's called a hectacorn now with OpenAI, $100 billion plus, right? People love to talk about those big numbers. And I think they're actually just increasingly misleading.

Yeah. Well, like you said, OpenAI, you know, they raised $6.5 billion, but they really focused on the $150 billion valuation. And why not? That gets you a lot of media coverage. It's gonna get you potential other investors who want to get in and inflate the valuation. You're going to get employees who are very excited. And even the potential customers may say, well, this company is going to be something special.

Yeah, it is. I mean, look, I think we understand— I understand, I don't like, but I understand the seduction or the temptation to talk about company size by market cap, which is effectively what this is, or by valuation. I still believe, and will fight forever, that revenue is a much better proxy. If you were to say, you know, a friend of mine was running a $30 million business that was worth a billion. When he retired, the headlines were billion-dollar CEO retires. It was like, come on, Charlie. His name was Charlie. But come on, Charlie, you weren't running a billion-dollar business. You're running a $30 billion business, right? Because that's how big the revenue was. So if I want to know kind of how big it is or what its impact is, then— or what its potential for producing margins are, I'd want to look at revenue, not company size. But we live in the world we live in. Everybody talks about these headline valuations. So I think in this episode we should talk about what they mean.

I was going to say, you know, we're here to not only entertain, even though I know we're very entertaining, but also to educate. So let's talk about valuation and what it really means, especially in context of these headline valuation announcements.

Sure. So look, they're using what would be called— when people say valuation and those kind of headlines, they're using what would be more technically known as market capitalization, also known as market cap. Again, a very simple formula. It's the price per share times the number of shares. So if you go for a public company and look at the trade, you know, the closing price of trading and just say it was $10 a share, you go look at the shares outstanding and there's 100 million shares, you go boom, that company is worth $1 billion, i.e., its valuation is $1 billion, i.e., its market cap, price per share, $10 times the number of shares, 100 million equals $1 billion. Thoughts on that one, Ray?

No, I think the public company is very easy, but can we kind of translate that to private companies?

Yeah, good point. Good point. So, so for private companies, it's a little trickier because we give all these stock options, right? The VP of sales might get 1%, 1.5%. Your other VPs might get 0.5%. So you may have 5%, 10% of the company gifted out, up to 20% for the whole pool if you include all employees of the company, kind of owned, if you will, by the stock option pool. And those options technically often are not exercised yet. So if you just count the number of shares outstanding, they're not there. So you have this notion of FDSO, fully diluted shares outstanding. And it's basically what are the shares outstanding if all the options were exercised? There may be some other things in there as well, but the big one I remember is, wait a minute, we have these shares that the VCs bought, we have these shares that the founders own, but the employees, let's just say at this company, they have 10 or 15% of the company. We need to include those in the share count. So that's called the FDSO. So for a private company, you're gonna look at the price per share and multiply by the fully diluted shares outstanding.

Yeah, I have a question for you, Dave, because we were talking about this as we were prepping for this episode, and you were saying in public companies sometimes the market capitalization might actually undervalue the value of the company. Can you talk more about that?

Yes, that's a great question, Ray. Look, the, the issue here is, is in some sense, is market cap a good way to figure out what a company's worth? Because if we just take my example of $10 a share times 100 million shares, Well, okay, I can multiply 10 by $100 million and get $1 billion. And that is the market cap definitionally of the company. But just say I wanted to buy that company. What do you think would happen to me if I just went on the open market and started gobbling up shares of that company?

Well, the price of that stock's going to go up.

Bingo. Right. Someone's going to notice that somebody is buying a bunch of shares of that company. So the price is going to go up. This is why when companies actually sell, they typically sell for a premium above the last day's trading price. For example, Darktrace recently sold to Thoma Bravo— not recently, but in April— for a 20% premium. So then the question might be, well, why would Thoma Bravo pay 20% more than the stock price? And the answer is 'cause the stock price is kind of for one share and Thoma Bravo wants to buy all the shares. And as you get all the shares, that's gonna drive you up that curve. In this case, they figured putting an offer out for 20% more would be enough to get the shares they needed to take control of the company. By contrast, IBM had to pay a 43% premium when they bought HashiCorp. So that's how it works, right? So in some sense, it almost understates the value of the company when you look at market cap for public companies.

Yeah, but for private companies, there's some problems with the market cap formula. So you want to talk about a couple of those big potential things that you need to understand, or problems that could arise?

Yeah, I mean, for private companies, it can overestimate it, in my opinion. So let's talk about it. So look, the first one I'll do is a corner case. But hey, Ray, I want to give you $100 for one share of Benchmark that represents a 0.0001% interest. Would you give me that share?

I love it. My, my company's now worth $100 million, Dave.

There you go. Boom. You watched it here live. Bench Market is now worth $100 million. That's all it would take by this formula, because what was this trading price of the last share? $100. And we multiply the number of shares, that interest percent inverted times that $100, and boom, Ray now owns a company worth $100 million. So there's the kind of one— I call it the one-share problem. And that translates— if a company that's raised a lot of money just raises $2 or $3 million, you could play that game and raise it at kind of a crazy valuation. Most people don't do this, but just mathematically, it's the problem. And public markets solve this problem through trading volumes. You can watch how much shares are trading at one price. That's why thinly traded stocks can be a little dangerous because you have very low trading volumes. But for bigger companies, if you're trading millions of shares a day, you can be pretty confident in the price. So that's one problem, when the amount of money put on the table is very small and we're just doing this massive multiplication of it. The other problem, the subtle problem, if we say that the market cap equals price times the number of shares, well, it kind of assumes that all the shares are the same. And for public companies, that's true, right? Typically they're all common stock. And therefore there's one class of stock, sometimes 2. But, but they're all fundamentally the same.

Yeah, because in, in the public companies, if you have a Class A and Class B stock, typically that's more about voting rights than anything else. Maybe the owners— I'm sorry, the owners being whether it's the institutional investors or the founders— have A stock and they get 10 votes more than a common stockholder.

Correct. I'd say we're speaking strictly inside of tech here, because outside of tech I'm less sure. I think some public tech companies may have public preferred stock, yada yada. But for the tech company world that we live in, if you see a Class A common and a Class B common, Usually that Class B, they kind of do it backwards to kind of head fake you. The Class B is the one that has the 10x voting rights, but in all other respects, they are identical. So, so in that case, that assumption about price per share times the number of shares, well, at least all the shares are the same. They're all— let's call them gold. They're all gold shares.

But it's not the same in VC land or private equity land. So why don't we talk about the different type of stocks there?

You're correct. So in VC land, as I think people hopefully know by now, that employees get options on common stock, venture capitalists buy preferred stock. In private equity land, investors get Class A units typically, and executives get Class B units, right? They're not the same. So I always call this gold stock and silver stock, that the investors tend to get gold stock and the employees tend to get silver stock or preferred stock. And the question is, what might those preferences be? Uh, like what makes it— what's the difference between Goldstock and Silverstock? Well, the Goldstock has certain preferences. Uh, well, what might they be? You want, you want me to cover that or you want to jump in?

Why don't you cover that? Because when you talk about liquidation preferences, I'm going to tell you about my personal experience with this.

Okay, okay, I'll do the textbook, you do the experience. So look, liquidation preference means I get my money back before you do, in effect, or I get my money back first. And when a company is sold, the first people to get their money back are the debt providers. But let's just say a private VC-backed company is sold. If they had $20 million of debt, boom, the first $20 million goes to the debt holders. Then we go look at the cap table and we look at the, you know, we might say, I'll just say 3 classes of preferred stock, Series A, Series B, Series C, and then common. And the typical pattern is the preferred has the right to get its money back first, and below a certain share price, it will actually take that right. And then above a certain share price, if the company's selling for a lot of money, they say, no, no, no, my 10% share is worth a lot more than just getting my money back. So each of those classes individually makes the decision, do I want my money back, 1x, or do I want my pro rata ownership? And for the nerds on the call, technically that's called non-participating 1x preference preferred stock, but that is kind of the norm, I'd say, in Silicon Valley.

Okay, and let me tell you my experience. It was my first S-1 filing for an IPO, and we had an investor, and we had done Series A, Series B, Series C. And let's just say the investors had invested $20 million And the post-money valuation was $80 million. So they owned 25% of the company, right? But we ended up selling the company for $100 million, and the last round of investors had 3x liquidation preferences. So instead of just getting their $20 million back, it was 3 times $20 million. So they got $60 million out of that $100 million acquisition. But then that preferred stock converted into common stock. So they actually then got another $10 million through their participating rights with the common. So at the end of the day, out of a $100 million acquisition, $70 million went to the investors.

Correct. Okay, so, and I did a blog on this before. If you just Google Kellogg, I think it was BlackBerry— when BlackBerry sold, they had lawsuits over this kind of issue because the employees basically thought they owned a certain percent of the company and no one had bothered to explain that there were people upstream of them on the cap table who had, in the case you've cited, what I would call a 3x participating preferred stock, meaning I get 3x my money back first before the common, i.e., the employees. And in addition, because it's participating, I also get my pro rata ownership. So if I own 20% of the company, I get $60 million back first plus my 20%— or I screwed the math up, but I get 3x my money back plus 20% of what's left over. And with non-participating, it's either you get 3x your money back or your 20% of the company that you owned. So I don't want to get too lost in the detail here, but the net effect is the common stock is last in line. And the result is Ray might have been expecting $1 or $2 a share in that transaction and he got a check for $0.40 a share and he was shocked. Look, Ray, I've worked with companies where the employees might have been expecting— if they looked at their percentage ownership, somebody goes, well, I've given you a 1% share. Say you're an early employee, big VP of sales hire, you have 1%. Company sells for $100 million, you go, oh, I must be getting $1 million. Great. Answer, no, there's $50 million worth of debt and we've raised $50 million at a 2x preference. So you get zero.

Zero.

And in such cases, what we'll usually do is people will throw a nominal value. They say, we'll give you a quarter to make sure nobody sues. So you'll see like $0.10 or $0.25 a share. And they're doing that because they know people who get zero tend to get very angry, whereas people get $0.25, you might be somewhat placated.

So Dave, you know, the topic of the show is these headline valuations are not quite what they seem. So we've talked about how liquidation and preferred preferences impact that. So why do companies and founders continue to do some of these vanity valuations? What do you think's behind it?

Yeah, so let's just talk about how you do one first. So we've talked about— there's a couple things we talked about. We talked about this notion of liquidation preferences, so I get my money back first. We— there, there are multiple forms of dirty terms out there. One is a multiple liquidation preference that Ray talked about in his example. Another one is a participating preference, which Ray also talked about in his example. And there are other terms, things like redemption rights, which are kind of mind-blowing, which is I'm buying shares of the company, but I could demand the company repurchase my shares from me at a pre-occurred price, a pre-agreed price at a certain time in the future. So you could literally bankrupt the company just saying, hey, I gave you $30 million and you agreed to buy them back for $60 million 3 years from now. And if the company doesn't have $60 million in the bank, which it almost certainly does not, I can exercise my redemption right and basically force liquidation of the company or force a sale of the company. So these are all pretty powerful hammers that people play with, and they can lead to vanity valuations where, just say I raise $100 million at $1 billion, but the company was really worth on a clean term sheet, let's say $600 million. But some VC goes, okay, well, I can give you $600 million with a clean term sheet, but if you wanna tell your friends you raised money at $1 billion, I can give you a term sheet that does that. It's gonna have a 2.5x participating preference. Or it's going to have that plus redemption rights, or it's going to have some pretty strong preferences that say, after the debt holders, I get a whole bunch of money back first, right? I'm getting 2.5 times my money back before anybody else gets anything, right? So, so, and that's how you get that billion-dollar valuation, because you've kind of juiced the power of that last round share.

But man, does it sound— feel good as a founder to say my company was just valued at a billion dollars?

It does. This is what happened. The unicorn phenomenon drove a lot of bad behavior, Ray, because people started talking about valuations in headlines. Everybody wanted to be one. And lo and behold, with some of these tricks, I could either trade a very low number of shares, not as common, or I can kind of juice the preferred shares to get a much higher valuation. I can go and impress my friends and the media will eat it up and repeat it and tell everyone that you're a unicorn. Congratulations. I've worked for unicorns, Ray, that couldn't clear the preference stack when they were done. When they sold the company, the common stock was worth zero. And at one point they were getting counted as unicorn and headlines as unicorn.

Now, Dave, and one of the other problems with this, whether you say you raise $50 million or $100 million at a billion dollars, maybe that— let's say $100 million— not all that $100 million is going right into the company to grow it. Because the other thing we're doing now is maybe we're buying out some early investors or some of the executives or early employees, and that's not disclosed either, right?

You're correct. You're one section ahead of me. I want to hit one more point and come back to that. So what Ray is basically— what I've been saying in this episode, when you read a headline that says company raised X dollars at Y valuation, that Y is suspect, right? And why? Because that— sorry for the Y and the Y.

Y, W-H-Y.

Why is the Y letter suspect? Because it represents price per share times number of shares. The number of shares is pretty clean with a private company. It's the FDSO. But that price per share can get kind of juiced by giving a share super strong preferences. And therefore I can kind of create this billion-dollar valuation by selling, say, a relatively small amount of stock, $50 million, but at a 20x multiple, or not 20x, but sell a small amount of stock, say $50 million, with really good terms that results in a valuation of a billion. And the way I think of this, Ray, just to make it simple, because I see we have time, is that think of it as having gold shares and silver shares. And the employees have silver shares and the investors have gold shares, sometimes different types of gold shares, maybe different gold purity. If you want to extend the metaphor. And the issue is those shares aren't all the same. So it just doesn't make sense to take the share price of the most valuable gold share, just say there's 5 levels of gold shares, and take that price and value the company by multiplying by the number of shares across all those classes, all the silver shares, all the gold 1, the gold 2, the gold 3, the gold 4. It doesn't make sense. There's only, in fact, one case where that makes sense, which is when you go public. And if you go public, the preferred typically converts to common on a 1-to-1 basis. So basically what a company is saying when they do this vanity valuation trick is, It's kind of a YOLO, shoot the moon, no guts, no glory exercise that if I can make it to being public, this will cost me nothing. I'll have gotten the amazing valuation and won't pay anything for it. But we now know it takes 15 years to go public and the odds are very much against you. So in other scenarios where you end up selling to private equity, then all this is going to work against you. People are going to get their preferences, yada, yada. So let's, let's wrap up the valuation problem and then come back. Do you have anything else you want to say on valuation before we talk about The secondary capital issue?

No, let's talk about secondary capital next.

All right. Do you want to do it? You want me to do it?

No, please. You're riffing well. Keep going.

All right. So we'll finish this. So remember I said a minute ago, company raises X dollars at Y valuation, and we just talked for most of the episode about why Y was suspect as a number. Let's talk about the X for a minute. When they talk about how much money they raised, I've seen examples where a company— and this is again another change from the days of yore. In the days of yore, if you said you raised $50 million, The company printed new shares, sold them to investors, put $50 million in the bank, and you could literally use that money to invest in hiring salespeople and engineers to build your product and your go-to-market. Now what happens is that $50 million can include secondary sales where we're either providing employee liquidity— founder liquidity is a subtype of employee— or buying out early-round investors. So the headline might say we raised $50 million at a billion-dollar valuation, But did $50 million actually go on the balance sheet? I know cases where as little as either $0 or $5 million, like, like almost none of it. 90% of the round went to buying out other people, and the company only ended up with like $5 million or paying off debt. So we pay off debt, sell shares to other people, and yeah, there's $5 million on the balance sheet.

Well, we're out of time, but I would love to go to my belief that maybe there should be some regulatory filing announcements around large private investments. But I think that might be a different episode, Dave.

Now you've got us into politics here, Ray. I don't want to talk about the solution, uh, and I'm not sure government is the solution. We're from the government, we're here to help. But, uh, I don't know the solutions, but I just do think the purpose of the episode was to make, you know, our readers informed consumers so that when you read this stuff, when you see company raises X dollars at Y valuation, you go, wait a minute, how real is that Y valuation? And probably equally, if it's one of your competitors, how much of that X am I going to be competing against? Because if they just put $100 billion on the balance sheet, it's kind of scary to me. I'm like, oh God, we're gonna get, you know, bombed with inbound marketing and sales perhaps. But, um, if a lot of it is just going to buy out other investors, they don't actually have money for growth. So, so we've got to look at both those components.

And I really enjoyed this. It forced me to really think. It forced me to go do some homework. And to our listening audience, hopefully that you actually walked away with, I'm going to be asking some of these questions next time. Thank you so much, Dave.

Thank you, Ray.

The Metrics Brothers AI, SaaS, and More is a production of The Metrics Brothers Growth and CAC And a member of the Benchmarket Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told.

Ahem.

Ray? Information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional or, for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X @RayReich. Dave Kellogg is based in Silicon Valley and available on X @Kelblog. Schedectady, which is French for unspellable, is not our actual production location. Thanks for listening.