Weekly Top 5 Papers – August 7th 2017


1. How to Read a Legal Opinion: A Guide for New Law Students by Orin Kerr (The George Washington University Law School)

2. Squaring Venture Capital Valuations with Reality by Will Gornall (University of British Columbia (UBC) – Sauder School of Business) and Ilya Strebulaev (Stanford University – Graduate School of Business)

Uber, AirBnB, SpaceX, and other private venture capital-backed (VC-backed) companies have delivered spectacular growth to their employees, venture capitalists, and entrepreneurs. Despite this, the true value of shares in these private companies has remained a black box. Our paper develops a financial model to estimate the fair value of venture capital-backed companies and of each type of security these companies issue. We estimate true values for more than 116 U.S. unicorns (VC-backed companies with a reported valuation above $1 billion) by applying our model to their most recent financing rounds using data from legal filings. We find that the average unicorn reports a valuation 49% above its fair value, with common shares overvalued by 59%. Almost one half (53 out of 116) of unicorns see their value fall below the $1 billion threshold when their valuation is recalculated and 11 unicorns are overvalued by more than 100%. Overvaluation arises because the reported valuations assume all of a company’s shares have the same price as the most recently issued shares. In practice, these most recently issued shares almost always have better cash flow rights than the previously issued shares. Equating their prices therefore significantly inflates valuations. Specifically, we find 53% of unicorns have given their most recent investors either a return guarantees in IPO (14%), the ability to block IPOs that do not return most of their investment (20%), seniority over all other investors (31%), or other important terms. Better knowledge of these terms and their impact on valuation will help entrepreneurs, employees, and venture make better decisions. – Will Gornall

3. Of Coups and the Constitution by Glenn Reynolds (University of Tennessee College of Law)
The idea for this piece started back when I read Charles Dunlap’s 1992 piece “Reflections on the Coup of 2012,” which was published in Parameters, the journal of the Army War College.  Ideas often percolate with me for a long time (my Ham Sandwich Nation piece also went  20+ years from conception to execution) and this one stayed in the back of my mind until I decided to start writing it in 2015.  At the time, I had no idea that all the coup-talk that surrounded (and followed) Donald Trump’s election to the White House was coming, and just saw it as an interesting example of how structure and relationship in the Constitution can take some issues largely off the table, often without people even realizing it.  Research was fun because it required me to learn a lot more about how to plan and execute a coup d’etat than most law professors ever learn.
I do think the piece also offers a useful warning about excessive constitutional tinkering.  If the Constitution makes a military coup fairly unlikely without most people even noticing that it does so, it may well be preventing other bad things from happening in a similar unnoticed fashion.  It’s possible that America’s comparatively long run of peace and prosperity has something to do with constitutional design, and isn’t just a result of the superior virtue of the American polity.  At least it’s a reason why we should think twice before making substantial changes. – Glenn Reynolds


4. Discovery in State Criminal Justice by Darryl Brown (University of Virginia School of Law)