Uber announced on Sunday that it had resolved the issues on its side necessary to proceed with a planned $10 billion investment by SoftBank. Keep in mind that it is still not certain that the deal will get done, although most observers seem to think the odds are now high. The deal closing is still contingent on enough current shareholders being willing to accept the price that SoftBank will offer for $9 billion, which would give SoftBank a reported 15% interest in the company. SoftBank will also buy $1 billion in new shares at a price that has been reported as the same price at its recent valuation, of $68-$69 billion.

The bizarre “new money valuation” has gone unchallenged in the press despite the fact that SoftBank has proposed buying the bulk of its shares at a 30+% discount to the last funding round. It’s particularly questionable given that, as a recent paper on unicorn valuations stressed, unicorns like Uber have valuations that are overstated by an average of 49%. The reason is that journalists accept uncritically venture capitalist blather about the value of the last financing. But pre-IPO venture-capital-funded companies don’t issue a single, fungible class of stock as public companies do. Each funding round has idiosyncratic voting rights and often economic rights too.

And there are reasons to doubt even the actual value of the SoftBank $1 billion of new money which is being presented as if it validates the last round of investment and thus will allow Uber to keep pretending it’s still worth than much….even with nine times as many shares being sold by insiders with superior knowledge at a vastly lower price.

While the terms for the $1 billion portion may have changed, some press reports indicated that the this portion would purchase a preferred stock. That gives it priority in bankruptcy. It could even be a cumulative preferred, so that payments accrue and have a specified priority if and when the business is profitable. If nothing else, “preferred” almost certainly means means this security has better economic rights than those received by investors in the last funding round. As a result, that means the valuation even on this $1 billion is at a discount to the last financing.

As someone who worked on Wall Street back when it was criminal only at the margin, it it bizarre to see a “down round” of funding occurring, with insiders planning to sell out on a significant basis, and the captured press treating this as business as usual. In my day, for an IPO, the very maximum insiders could cash out was 16%, pretty much the level SoftBank plans to buy, and then only if they were also raising a large amount of money for the current operation (meaning at least as much as the insider sale) and had a very good growth story to tell. Now one can say that this just means SoftBank is overeager or stupid. But insiders selling out on such a scale pre-IPO is not a good look, to put it mildly.

Finally, in his assessment of the significance of this announcement, Hubert Horan mentions Uber’s UK court loss in passing. I am remiss in not writing up this case in detail, but it is significant by virtue of London being Uber’s most (only?) profitable foreign market. This appellate court judgment would seem to destroy Uber’s business model in the UK permanently since this ruling, like the lower court one it affirmed, is very solid on the logic and recitation of facts, and it seems unlikely that this ruling would be overturned at the High Court, were it even willing to hear the case. Moreover, the appellate judge, Judge Eady, is apparently of the “a contract is a contract is a contract” school, yet threw out Uber’s argument, that all you had to do was look at the contract and see that the drivers could not possibly be employees (which among other things would entitle them to minimum wage once they had the app on within their authorized territory) because the contract said not (the drivers provided “transportation services”; Uber was a mere booking agent). From the opening section of the ruling:

In considering the ET’s [Employment Tribunal’s] findings, it was necessary to have regard to its Judgment as a whole. Doing so, it was apparent that they were neither inconsistent nor perverse. In particular, the ET had permissibly concluded there were obligations upon Uber drivers that they should accept trips offered by ULL and that they should not cancel trips once accepted (there being potential penalties for doing so). It was, further, no objection that the ET’s approach required the drivers not only to be in the relevant territory, with the app switched on, but also to be “able and willing to accept assignments”; that was consistent with Uber’s own description of a driver’s obligation when “on-duty”. These findings had informed the ET’s conclusions not just on worker status but also on working time and as to the approach to be taken to their rights to minimum wage. Inevitably the assessment it had carried out was fact- and context-specific. To the extent that drivers, in between accepting trips for ULL [Uber London Ltd], might hold themselves out as available to other PHV operators, the same analysis might not apply; hence the ET’s observation that it would be a matter of evidence in each case whether and for how long a driver remained ready and willing to accept trips for ULL.

If you skim the ruling, you can see the many ways Uber exercises control over the drivers, requires them to accept rides, and threatens to punish them if they seek to establish a relationship with a passenger by responding to a request to have their phone number or asking a rider for their number.

Clive flagged this part:

73. Having found that the terms on which Uber relied did not correspond with the reality of its relationship with the drivers, the ET considered itself free to disregard them; noting the unequal bargaining positions of the parties (in particular, many Uber drivers – a substantial proportion of whom did not speak English as their first language – would be unused to reading and interpreting dense legal documents couched in impenetrable prose), the ET saw this as: “96. … an excellent illustration of the phenomenon of which Elias J (the presiding judge) warned in the Kalwak case of “armies of lawyers” contriving documents in their clients’ interests which simply misrepresent the true rights and obligations on both sides”

Ouch.

In any event, it is hard to see SoftBank not wanting a lower valuation in light of this loss…unless it had already assumed the appeal would fail.

Now to Hubert’s take: