A friend of mine and I have been debating unicorns for months. And what we concluded is that there are two stories.
The first story is that there are a bunch of excellent businesses that are worth billions. These are the true unicorns. I won’t hazard a guess of how many or which companies fit that bill.
The second story is that there are a bunch of donkeys with horns that are using creative deal structures to acquire valuations that are questionable. And that the story of the true unicorns is hiding the story of the donkeys.
The recent article on TechCrunch tells us that the number of potential donkeys is on the rise.
And so my buddy and I debated the impact of these potentially faux-Unicorns.
The first narrative, dominating the press, is the effect of faux-Unicorns on investors. After a lot of discussions, we concluded that the recent faux-Unicorn phenomenon of artificially constructed valuations is benign to positive. Positive because it mitigates the downside risk, and because it captures more of the upside if an acquisition occurs at the cost of investing more capital in a business that has achieved a certain amount of success.
If you take a unicorn job in 2015 and never say the words “liquidation preferences”, you are the sucker at the table https://t.co/cbh3lPRA9a
— Alex Stamos (@alexstamos) December 24, 2015
The second narrative that is emerging is the impact of faux-Unicorns on employees. There we agreed that the story is downright appalling. The shift of risk from investors to employees who find themselves locked in, or worse, have their interests misaligned with the core investors, or even worse is not positive.
The derisking for investors and founders is increasing the risk of employees.
And so what?
The danger is that employees eventually figure this out. And they start demanding higher salaries, longer periods between when they quit and when they have to sell their shares or just plain refuse to work for any private company.
Furthermore, as more employees figure out that a Unicorn or a startup is not a path to riches, and that the investment strategies are being used that minimize their already minimal chances of wealth, people will over the long-term lose interest in working at startups.
And worse, because employees are not investors they have a hard time disambiguating faux-Unicorns from real Unicorns.
If a startup is a job where you work long hours, at low pay, to change the world, there are a lot of options that are not working in tech.
We can talk about culture, and opportunity and learning and if there is no money, then people will go elsewhere.
The people who work in the tech sector have the ability to do anything they want. And eventually, they figure that out.