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Valuing Young Startups Is Unavoidably Difficult: Using (And Misusing) Deferred-Equity Instruments For Seed Investing, John L. Orcutt

Law Faculty Scholarship

In a well-functioning market, reasonable investors are less likely to invest in companies when they cannot confidently value the opportunity. This presents a serious problem for young startups because they are unavoidably difficult to value. Partly in response to the valuation challenge, specialized startup investors evolved how they contract for young-startup investments. Around 2005 they began using deferred-equity instruments (first convertible notes, and later safes and the KISS). Deferred-equity instruments offer a partial solution to the valuation challenge by allowing specialized startup investors to thoughtfully invest in venture capital-eligible young startups without valuing them at the time of investment. Deferred-equity …