Fintech startup Checkout.com was in the news this morning because the Financial Times reported that the payment company had slashed its internal valuation to $11 billion. And it’s a huge drop compared to the $40 billion valuation that the company reached a little less than a year ago.
But that doesn’t necessarily mean what you think it means. In Checkout.com’s case, the company wasn’t in the process of raising a new funding round. Unlike Klarna’s down round, the new valuation wasn’t determined by a VC firm willing to invest in the company.
Checkout.com is building a full-stack payments company — it acts as a gateway, an acquirer, a risk engine and a payment processor. The company lets you process payments directly on your site or in your app, but you can also rely on hosted payment pages, create payment links, etc. It supports card payments, Apple Pay, Google Pay, PayPal, Alipay, bank transfers, SEPA direct debits and it also lets you issue payouts.
Let me take a step back first. It’s hard to determine how much a private company is worth. The post-money valuation has been used as a metric for startups to see how big they are compared to their direct competitors. If Big VC Firm is willing to invest $100 million for a 25% stake of a startup, the startup is now worth four times this investment, or $400 million — at least on paper.
But that metric is imperfect, as companies don’t raise at the same time and the economic environment can drastically change from one year to another. And entrepreneurs tell me that January 2022 is very different from December 2022.
It has become much harder to close a new funding round. Entrepreneurs need to make some concessions. They sometimes will hand out a bigger chunk of their cap table for the same round size, which leads to… a lower valuation.
Some startups accept liquidation preferences and other investor-friendly clauses so their valuation remains stable. In that case, the valuation becomes even more meaningless as VCs expect bigger returns than what they’re supposed to get on paper.
But valuations aren’t just big numbers for headlines. They also matter for employees who own stock options.
“We took advantage of the current conditions to update the tax valuation of the company. We decided to do that for our employees so that we can re-strike all the options that have been handed out recently and therefore create more upside potential for them — they will have to pay less for those options,” Checkout.com founder and CEO Guillaume Pousaz told me.
That reminds me of another payment company that also decided to lower its internal valuation. This summer, Stripe lowered its own valuation to around $74 billion from $95 billion.
In Stripe’s case, the company worked with third-parties to update its 409A valuation, which changes the value of employee stock options. It has implications when it comes to taxes, as employees usually pay taxes on the difference between the price of their options and the new share value as defined by the new 409A valuation.
I asked Guillaume Pousaz if Checkout.com’s new valuation was similar to a 409A valuation update. “Yes, it’s like a 409A. It has to be produced by an accounting and auditing firm,” he told me.
There isn’t a lot of chatter about 409A valuations in the European startup community. And Checkout.com is a rare example of an internal valuation change. It could mean that some VC firms overpaid to invest in the fintech startup. It could also mean that tech companies are now valued at a lower revenue multiple compared to 2021.
But it doesn’t say much about the upcoming negotiations between VC firms that want to invest in Checkout.com and the startup’s executives. They will land on a different valuation. But that would require a new funding round, which doesn’t seem likely in the current landscape.
“We don’t need to raise money and there are no plans in that respect,” Pousaz said. “To be honest, we don’t have to raise again. Never say never, but unlike many fintech companies, we have a proven business model.”