What it means
The threshold is simply a round number: cross $1 billion of valuation while still privately held and the company qualifies. There is no regulator or committee that confers the status, which is part of why the term gets used so loosely.
It matters mostly as a signal. Unicorn status helps with recruiting, gets a young company taken seriously by large enterprise customers and often makes the next funding round easier, which is why founders and their backers are usually happy to publicise it.
The valuation itself comes from the post-money value of the latest round, calculated by dividing the amount invested by the percentage of the company sold. If an investor pays $50,000,000 for 4% of a business, the arithmetic implies the whole thing is worth $1,250,000,000.
That arithmetic hides an important nuance. The new investor almost always buys preferred shares carrying a liquidation preference, meaning they get their money back before ordinary shareholders see anything, so the headline valuation overstates what employee share options are really worth.
Valuations move in both directions. A company that raises at a lower valuation than its previous round has taken a down round and can lose unicorn status overnight, while those that travel far past the threshold are sometimes labelled decacorns at $10 billion.
The label also shapes behaviour inside the company itself. Chasing a headline number can push founders towards terms that read well in a press release but carry heavy obligations, such as ratchets that hand investors extra shares for free if a later round prices below the last one.
In practice
Real-world examples.
Example
A payments start-up raises $80,000,000 for 5% of its equity, implying a post-money valuation of $80,000,000 / 0.05 = $1,600,000,000. The founders announce the round as a unicorn milestone even though the company is still loss-making and expects to need a further raise within two years. Recruitment applications triple in the month after the announcement.
Example
A delivery business is valued at $1,100,000,000 in its latest round but carries $600,000,000 of liquidation preferences ahead of ordinary shares. When it later sells for $900,000,000, preferred investors take their $600,000,000 first and ordinary holders share the remaining $300,000,000.
Example
A health technology company raises at a $700,000,000 valuation, half its previous $1,400,000,000 round. It stops being a unicorn, existing share options are repriced, and several senior hires who joined largely for the equity leave within a year.
Formula
Calculation
Post-money valuation = amount invested / percentage of the company sold
Pre-money valuation = post-money valuation - amount invested
A logistics software business raises $50,000,000 by issuing 4,000,000 new shares at $12.50 each, since 4,000,000 x $12.50 = $50,000,000. Before the round it had 96,000,000 shares outstanding, so afterwards there are 96,000,000 + 4,000,000 = 100,000,000 shares in issue and the new investor owns 4,000,000 / 100,000,000 = 4% of the company.
Applying the formula, the post-money valuation is $50,000,000 / 0.04 = $1,250,000,000. The same answer falls out of multiplying all 100,000,000 shares by the $12.50 round price. The pre-money valuation is $1,250,000,000 - $50,000,000 = $1,200,000,000, which is also 96,000,000 x $12.50. Crossing the $1 billion mark makes this business a unicorn, on paper at least.Case study
Seen in the real world.
Nimbus Freight Systems is an illustrative, fictional freight booking platform. Its Series D raised $120,000,000 for 8% of the company, implying a post-money valuation of $120,000,000 / 0.08 = $1,500,000,000 and a pre-money figure of $1,500,000,000 - $120,000,000 = $1,380,000,000.
Press coverage focused entirely on the unicorn label. Internally the finance team was more interested in the fact that the round carried a one times liquidation preference, so the first $120,000,000 of any eventual sale would go to the new investor before anybody else received a cent.
Two years later growth slowed and the following round priced the business at $900,000,000. In this illustrative case nothing about the underlying operation had collapsed; the valuation had simply been set by what one investor would pay on one particular day, and a different day produced a different number.
Watch out
Common mistakes.
- Reading a unicorn valuation as though it were a market capitalisation, when only a small slice of shares actually changed hands at that price.
- Assuming unicorn status means the business is profitable, when many carry heavy losses and depend on raising more money.
- Valuing employee share options at the headline round price, ignoring the liquidation preferences that sit ahead of ordinary shares.
Questions
People also ask.
Does a unicorn have to be a technology company?
No, although software and internet businesses dominate the list because they can grow revenue without matching increases in cost.
What happens when a unicorn lists on a stock exchange?
It stops being a unicorn by definition, since the term applies only to private companies, and the public market then sets a fresh valuation that may be higher or lower.
Can a company lose unicorn status?
Yes, a down round, a write-down by an investor or a sale below $1 billion all remove it, and none of those events is unusual.
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