Dropbox Is Not Worth As Much As You Think, But Then Again, Neither Are Most Startups

A fairly prominent Silicon Valley investor I know is upset about Dropbox.

Here's what's bugging him.

In 2011, Dropbox raised $250 million.

Everyone reported that Dropbox raised this amount at a $4 billion valuation.

But according this investor, Dropbox actually raised that $250 million at a much lower valuation.

He says that actually, Dropbox sold some "preferred" at a $4 billion valuation and some "common" stock at a valuation closer to $1 billion.

So, according to this investor, it is inaccurate to say Dropbox is worth $4 billion.

This investor does not know any this information first hand. He's not a Dropbox investor, and he only heard about some of these valuation figures by chatting with people who are.

Still, I believe him.

The reason I believe him is that pretty much all startups sell preferred stock to investors at a higher valuation than their common stock.

Preferred stock is more expensive because it comes with special rights and privileges. The main one is that, in the event of a sale, preferred stockholders get their money first.

Meanwhile, those of us in the press love big, sexy numbers, so we typically report the valuation of the preferred stock.

Add it all up and the answer is: yes, Dropbox is probably not worth as much as you thought.

Then again, the same could be said for all the other "billion dollar" late stage startups out there: Airbnb, Uber, and Box.

There is nothing dubious about this state of affairs – so long as companies like Dropbox are honest with their employees about how much their stock, which is common stock, is actually worth.

We've seen no evidence that Dropbox or any other startups are being dishonest.

Which is good.

Because if startups were being dishonest with employees or potential employees, they'd be setting themselves up for all kinds of nasty fraud lawsuits by employees and maybe even an investigating from the IRS.