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Comment by lquist | Hacker News Reader

This shows a lack of understanding of the structure of late stage VC deals. These are convertible notes, not straight equity. Also, what is the liquidation preference on this round? My guess is that this $20M note is the most senior debt, so if there is a wind down, they get their $20M first. So, KPCB has hedged some of the downside. And this is the important bit: their hedge increases as the percent they take in the round decreases. In a bankruptcy, they could probably at least get $20M out of the company.

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You seem to be missing the premise of the argument. You're right that they hedge the downside on this individual deal, but the point is that the upside for this individual deal is still small for KPCB. So why would they do it? Not because they're expecting an upside on that deal, but because inflating the valuation of a darling at a low cost will create a frothier overall valuation market for their portfolio.

You are completely missing the plot.

First, forget liquidation preferences. $20 million is a drop in the bucket to Kleiner. This funding is not concerned with downside; as the post clearly explains, it's designed to manufacture leverage to the upside. Note that leverage isn't exclusive to Snapchat; the name of the game is perpetuating and promoting the market dynamic of arguably insane valuations.

Second, if this was convertible debt, it wouldn't be pegged to a valuation. The use of late stage convertible debt is typical when the funding would be dilutive and the company needs a bridge to its next round of funding. You often see existing (and not new) investors do late stage convertible deals because they're less concerned with valuation and maximizing their stake. Kleiner, as far as I know, is a new investor in Snapchat, and having raised well over $100 million in the past year and a half, I doubt very much that Snapchat needs a bridge.

> This shows a lack of understanding of the structure of late stage VC deals. These are convertible notes, not straight equity.

Capital structure doesn't change the enterprise value of a company. Call it equity, venture debt, mezzanine, super-duper late series H, etc. Enterprise value is what is. The capital structure can be 100% equity, it can be 99% debt and 1% equity, but valuation, which is what the article talks about refers to a $2bn to $10bn change in value. I think you should check some corporate finance theory[0], it might help clarify things.

[0] https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo...

The point was that an $8 billion valuation for a company with no revenue model is insane, and that this deal has been structured in such a way as to help inflate talked-about valuation numbers to those heights.

The structure of the deal is less central to that argument. If it's convertible debt, does that really matter if the point is lost on most people? If the point of inflating the valuation is hype, then who cares how it's structured.

I suspect a better measure of valuation would incorporate the investment amount. If a VC firm invests $X at a valuation of $Y, then it conveys a lot of information (on the beliefs of the VC firm) if X is close to Y, but decreasing information as X decreases.

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