Unicorn

What it means

A unicorn is a private startup whose shares are not traded on a stock exchange and whose valuation has reached at least one billion dollars. The term was coined in 2013 by investor Aileen Lee to stress how rare such companies are. A company valued at more than ten billion is called a decacorn.

A unicorn's valuation is not based on profit or on the book value of its assets. It is set by the price at which investors bought a stake in the latest funding round, scaled up to the whole company. It is therefore the post-money valuation of a single transaction, not a market price.

Many unicorns are loss-making and fund their growth with venture capital. Their value rests on expectations of future market share and profitability. When expectations shift or capital becomes more expensive, the valuation in the next round can fall sharply, which is known as a down round.

How it works in practice

The round valuation often does not match the value of ordinary shares. Investors receive preference shares with a liquidation preference, so they get their money back first when the company is sold. Founders and employees holding options under an ESOP may receive far less in a lower-priced sale than the unicorn label suggests.

For suppliers, partners and job candidates, financial stability matters more than valuation. Before signing a large contract, look at the burn rate, the runway and the publicly filed accounts of subsidiaries, which often operate in Slovakia as well.

Investors get out of a unicorn through an exit: an IPO, a sale to a strategic buyer or a secondary sale of shares. Until an exit happens, it is an illiquid investment, and the paper value of a stake cannot easily be turned into cash.

What to watch out for

The unicorn label is powerful marketing but says nothing about profitability or whether the company will survive. A valuation can be inflated by terms that guarantee investors a return, so when assessing a company look at revenue, margin and cash flow, not just the billion-dollar mark.

If an employee receives shares or options as part of their pay, taxable income may arise when they are acquired, not only when they are sold. Anyone joining a fast-growing startup should check the tax consequences and the rules that apply if they leave the company.