Ride sharing Lyft is beginning to show all the weaknesses in the current Silicon Valley startup equity model as the company sees ‘ratchet clauses’ invoked by investors seeking their returns dilute the stakeholdings of earlier supporters.
One thing a lot of people will be the effects on early employees as the equity they took in lieu of a market wage is eroded by the increased stake of later venture capital investors.
What we’re seeing with Lyft are the limits of the 5-4-1 model of the current tech boom where for every ten dollars invested; one dollar goes into product development, four into customer acquisition and five into marketing.
The idea in the marketing is to attract more investors and ultimately to seduce a trade buyer or impress the stock market ahead of an Initial Public Offering.
In Lyft’s case the company is spending $96 million a year on marketing, twice its income. The company has raised a total of $800 million since it was founded giving the company a valuation of $2.5 billion.
As we’ve discussed before, these billion dollar valuations are as much a curse for a startup as a mark of success. Now the realities of a being unicorn are dawning on the employees who are often the oldest shareholders.