Create Your Own Valuation

Abstract

I find noticeable bunching in the distribution of private company valuations, suggesting that companies stretch valuations to achieve certain targets. I ask how companies do it and why. Newly authorized but unissued shares for future employee compensation (e.g., stock options) account for 11% of the reported valuations. Regression discontinuity design suggests that achieving unicorn status (valuation of $1 billion or higher) makes employees more favorably assess the companies they work for. Textual analysis shows that increased satisfaction with compensation is the main reason. Inflating reported valuations, however, lowers the expected value of employee stock options. Providing simple stock option payoff diagrams to employees can reduce information frictions.

Keywords: Valuation, Startup, Venture Capital, Stock Option, Human Capital

JEL Classification: G24, G32, L26