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The Math Behind Uber’s $18 Billion Valuation

When the ride-dispatching company Uber announced recently that it had raised $1.2 billion in a deal that valued that company at $18.2 billion, a casual observer might have assumed that the company would need to be worth that much or more for the investors to make money.

In fact, an analysis of Uber’s multiple rounds of financing shows that if the company were sold for anything over $1.9 billion, all the investors would recoup at least what they’d originally invested, with some later backers making a profit even at that comparatively low price.

Uber, of course, seems destined to be worth far more than a couple of billion. The company is generating hundreds of millions of dollars in revenue, and investors are clamoring to get in. But wouldn’t you fight to put money in, too, if a series of safety nets took most of the risk off the table?

There isn’t anything especially unusual in the Uber deal, but it provides an interesting window into the complex financial structures that lie behind many of the big recent investments in hot startup companies.

Details of Uber’s latest funding round, Round D, are available in the company’s recently filed certificate of incorporation. Before I break down what’s in the document, I’ll mention a few things that you don’t see.

For one, the preferred shareholders have equal seniority and are paid out at the same time in the event of a sale. The legalese term for this is pari passu, and it ensures that all the preferred classes are treated the same— an especially good protection for founders and early-stage investors.

Also, while there is a standard  “liquidation preference” for preferred shareholders, which lets them get their money back before others are paid out, there’s no “participating” preference that would let investors also take a cut of the remaining proceeds. Participating preferences often leave employees and other common shareholders with a lot less money.

Here are the specifics from the filing, and what they mean.

The Valuation

Investors in the latest round, including Fidelity, Blackrock and Wellington Asset Management, paid $62.05 a share for the company. Uber said that it had raised $1.2 billion at a post-money valuation of $18.2 billion (the “pre-money” valuation is about $17 billion). Using those numbers, Uber has about 293.3 million fully diluted shares, which includes all the warrants, preferred and common stock that currently belong to a person or entity.

The filing says the company is authorized to issue a total of 752.8 million shares. The number is much bigger than the fully diluted number because extra equity is kept around for future grants to employees and investors. In the case of an IPO, the extra common shares will be swapped in for the outstanding preferred shares.

(Throughout the rest of the story when I reference the number of shares in each class, I’m talking about the authorized number, or the maximum number that could hypothetically be sold or given out.)

The Ownership Structure

In the event of a public offering, some preferred shareholders could get a bigger percentage of the company than they currently own.

For most investors, their preferred stock converts to common at a 1:1 ratio in the event of a public offering. But preferred shares owned by Series A investors will be worth about 1.27 common shares when they convert. Crunch Base says Series A investors includes Benchmark Capital (which also participated in the latest mega-funding), Lowercase Capital and First Round Capital.

This sort of adjustment helps combat dilution. It could also make Series A investors, collectively, the largest holders of publicly traded Uber stock. The company is currently allowed to issue up to 38 million shares of Series A shares, the second largest class of preferred stock. Uber is authorized to issue 43.5 million shares of Series Seed, which is owned by Uber’s co-founders Travis Kalanick and Garret Camp, according to Crunch Base. If all of the Series A shares are fully diluted at the time of an IPO, the stake will convert to about 48.3 million common shares.

Early stage investors and the company’s founders would also maintain a majority of the shareholder voting rights thanks to the dual share-class provision. This isn’t so unusual. Facebook, Google and Groupon all have similar structures.

In an IPO, preferred stock held by the early stage investors—Seed, Series A and Series B investors—would convert to Class B common stock, which has 10 votes per share. Preferred stock held by later stage investors including TPG, Google Ventures, Fidelity, BlackRock and Wellington would convert to Class A common, the one-vote-per-share equity that the employees will get.

Class B common stock has effective control of the company so long as the ratio of Class B common to Class A common is greater than 1:10.

Investor Protections

If Uber were acquired or wound down (events that pretty much no one believes will happen), the investors have a liquidation preference which guarantees that they get their money back before the common shareholders.

In most cases they get out per share exactly what they put in. For the Series C investors, however, including Benchmark Capital, Google Ventures and TPG, they get 1.25 times what they paid per share, giving them a guaranteed return of 25%.

The total value of the liquidation preferences, or what it would take to make investors whole, amounts to about $1.9 billion. Anything leftover would be divided up among common shareholders.

The Paper Profits

Just in case Uber’s investors didn’t already have millions, investing in the company has already created some big paper returns. At $62.05 a share, the Seed round shares have seen a 1,712 times return; the Series A preferred has a 168 times return; and Series B has a 44 times return.

For Series C, things are broken up between the swath of stock held by TPG, which paid $114.032 a share, and that held by the other investors in the class, who paid $142.54 a share. Adjusted for a big 10 to 1 stock split, TPG’s investment is now worth 5.4 times what the firm originally paid. For the other Series C shareholders, their investment is worth 4.4 times what they originally paid.

A spokesperson at the company didn’t return a call for comment as to why TPG paid less than the other investors in the round.

Dividend Payments

All preferred stockholders are also entitled to a dividend payment on their stock, which ranges from 6.3% for Series A investors to 8% for all the other share classes.

Before diving into the minutiae of the dividend, let’s compare an 8% return to what’s going on in the broader financial world. The S&P total return for the year is about 4.8%. Junk bonds, which are supposed to pay investors a premium for taking on more risk, yield 5%. Uber’s shareholders now include Fidelity, Wellington Asset Management and BlackRock, investors who usually make money in public markets where 8% is a hard number to hit.

Two lawyers pointed out that this sort of dividend payment (non-cumulative, in Wall Street parlance) is up to the discretion of the board, is not guaranteed and is only paid in rare circumstances. In the end the provision doesn’t offer a lot of protection or guarantee a return if things go south.

But Uber’s board includes chief executive Travis Kalanick, co-founder Garett Camp, Benchmark Capital’s Bill Gurley, Google Ventures chairman David Drummond and TPG’s co-founder David Bonderman. These men work at firms that collectively represent every class of preferred shareholder in the incorporation document. Should the question of whether or not to approve a dividend come up, the investors in Benchmark and TPG at the very least would seemingly want a yes vote.

An Uber board member confirms that no dividends have yet been paid. Given that the maximum dividend payment stands at $142 million, paying now would effectively depress the value of the company. No investor wants that.

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All preferred stockholders are also entitled to a dividend payment on their stock, which ranges from 6.3% for Series A investors to 8% for all the other share classes.