When $3 Billion is Not $3 Billion

It is time for the technology industry to change how it discusses company valuations.

The press, investors and entrepreneurs have been fixated on some eye-popping numbers. $10 billion for Dropbox. $10 billion for Airbnb. Larger than some large hotel chains! Approaching American Airlines!

But those numbers don’t represent the actual value of a company. Rather, they’re an extrapolation based on what a specific investor was willing to pay for a small stake in a company at a specific period in time. Because such investments are often accompanied by a variety of special rights, including liquidation preferences and other downside protections, these extrapolations don’t tell the whole story. The equity that venture investors usually get is called “preferred stock” for a reason, after all.  

Take Uber. When TPG, Google Ventures and others invested $258 million last year in the ride-sharing company at a valuation of more than $3 billion, they got several special terms, as is customary.