Should I Change My Last Name to .AI?

The “not so amusing” valuation amusement park 

Valuation multiples ebb and flow almost like an old school, rickety roller coaster. Peaks and troughs along the coaster track may signify the highest valuations in the marketplace, while the ground below—only visible through those wooden white slabs beneath the track—signifies the lower valued companies.

Along the bottom of that coaster is a rubber band connected to that ground below. It stretches and contracts as the coaster goes on its ride through valuation cycles. But be careful, because when the valuation dispersion becomes too extreme, the rubber band may snap in half.

In any cycle, the coaster represents the “haves,” while the “have nots”—those companies seemingly bound by earth’s normal gravitational pull and conventional valuations—remain on the ground. We are at a moment when seemingly any company with .ai as its last name is a runaway coaster. Everyone else is left on the ground, staring up, wondering when the coaster will head back down to earth—and hoping there are enough nutrients to keep the earth lushly green while they wait.

Our hundreds of conversations with founders this past year have clustered around many of these challenges. Here are some observations and thoughts:

AI founders

Congrats. Your fundraising timing is amazing. Your valuations are gravity-defying, your structure is clean, and your Annual Recurring Revenue (ARR) is ramping up. Maybe this time is different. Maybe it’s not. Here are a few things to think about:

• Secondaries: If people are willing to buy you stock, not just “mark it” at these lofty levels, consider selling a meaningful portion in secondary (see “To Take a Secondary or Not—Now that is the Question”). In our experience, few founders regret selling, while many founders regret NOT selling. And remember, whoever just bought your stock in a secondary is estimating it will go up substantially. So, if they’re right, the REST of your stock may increase substantially too. And while the marginal utility of the gain on that future denominator is likely zero, the proceeds from a secondary transaction can change your life today.
• Structuring Your Equity: With valuations moving up at an unparalleled pace and magnitude, it may make sense to move some of your equity into different trust structures. Or maybe not. Pay careful attention to vesting schedules as well as gifting vs freezing techniques! Remember, structuring techniques can significantly change the outcome to your family’s bottom line (see “Don’t Conflate a Deal’s Headline Number with your Family’s Bottom Line Result”).
• Remember Blockbuster: If you don’t remember Blockbuster video stores, it’s because of the onset of Tivo, DVRs, and ultimately streaming on demand. This isn’t to say the founders and franchise owners of Blockbuster didn’t make money, but simply to remind you that the venture community is putting a lot of chips on the table right now. They expect most to get swiped off when someone rolls craps (or invents a better AI). So, be mindful of what may be lightning in a bottle. And remember that even if you’re soaring on that coaster right now, some of the onlookers far beneath you were sitting right next to you a mere few seconds ago because cycles can turn as quickly as the coaster.

Every other kind of founder

This is a painful time for anyone not born with “.ai” as their last name. Even if it’s your middle name and there is a fair amount of “ai” within your business DNA, it doesn’t matter. You never get called by your middle name or line up in gym class by it, and you may even wish it wasn’t there at all. If you aren’t AI native, you’re on the ground after being ejected from your coaster seat just a few seconds ago.

Consider that SAAS founders were darlings a year ago and CPG brands were crushing it with growing omnichannel presence. But none of that matters now. The main thing we tell founders standing on the ground, staring up at the coaster—that seems to be transforming into a rocket ship in front of their eyes—is that you simply need to figure out how to survive along the way.

Many are in the fortunate position of not needing to raise capital right now. For those lucky founders, the coaster may be fun to look at, but it’s simply noise. But for many other non-AI founders, we’ve heard some similar themes over the past year:

“When did 50% YOY growth suddenly become unexciting?”

“6 months ago, every VC wanted to talk to me. Now most won’t even take a meeting or consider presenting me to their investment committee.”  

“I’m being forced to raise capital in a crazy down round even though I’m crushing the metrics people were so excited about just 12 months ago.” 

“I think I need to lay off half my team.” 

Our main advice here centers on a few things:

• Structuring Your Equity: This may be a great time to structure your equity for a number of reasons.  
  • Consider using the lower valuations to make strategic gifting decisions to a variety of trusts.  
  • While it can be painful to do a down round (or even see a down 409a valuation), be opportunistic regarding any significantly lower valuation. If you still believe it’s binary, consider freeze techniques like Grantor Retained Annuity Trusts (GRATs) vs completed gift trusts. If the valuation rubber band snaps back, GRATs can be effective ways to get more value into trusts that can then help with both income tax and estate planning in the future.
• Inside Rounds: Focus on your believers. They want you to survive as much as you and your customers do and will be kinder than new investors.
• Equity Re-ups: While you may see dilution or restructuring in your vested (or at least 83b) equity, ask for top-ups in options, even if they’re attached with performance triggers. And focus on what you can control at the company-level, not the macro roller coaster environment.

Thinking about the future

People often talk about winter coming, especially Crypto Winter. And, in truth, we are in a winter for all non-ai family members. Folks still on the coaster and those on the ground should be mindful of where we are in the cycle and should focus on finding opportunities and ways to mitigate risk. If you’re on the ground, keep your jacket zipped. And if you’re on the coaster, keep your hat and sunglasses securely tightened so you don’t get too blinded by all sunlight that’s shining on you—for now!

At Corient, we can help navigate each part of a cycle, focusing on what’s best for our founders—which may or may not always be aligned with what’s best for your shareholders or investors. We are here to help and provide counsel around—and insight into—what we are seeing and hearing from both the ground and coaster vantage points.

Speak to a Corient Wealth Advisor to discover how the Corient Entrepreneurs & Founders Group can help you at every step along your wealth journey.

ABOUT THE AUTHOR