Mar 4, 2016 · 6 minutes

This week, Fidelity downgraded several of the Valley’s top unicorns… again. In all 19 companies were downgraded, including Y Combinator stars Dropbox and Zenefits, both already downgraded before this.

Cue the gang of investors who argued we were never in a bubble and these companies were if anything “cheap”, to come in and justify why the ongoing downgrades are really that big of a deal.

Oh, hey there, Paul Graham. The same Paul Graham who mocked a Pando reporter for failing to praise the brilliance of Zenefits during a YC demo day. The same Paul Graham who blistered our reporters (and banned us from attending his events) for daring to question how Stripe could be worth billions of dollars when it does less volume than Square (which is still trading below its private valuation, btw) and less volume than Braintree who was acquired for “just” $800 million. The same Paul Graham who at one time wrote that some 95% of the value in his portfolio are just two companies: Airbnb and …. uh… Dropbox. The same Paul Graham who even enraged other VCs when he argued income inequality was a good thing, without any acknowledgement of the privilege many startup founders and VCs were born into. Yeah, hey Paul Graham.

So what does Graham have to say now that institutional investors like Fidelity-- you know the exact ones that would be the buyers in an eventual IPO-- don’t consider his companies “cheap” at unicorn prices after all?

The implication is something a lot of VCs have been saying when their companies are faced with downrounds: Public companies trade down all the time, so why should we act like it’s a negative signal with private companies? There’s nothing to see here. Move along.

I get why investors like Graham do this, and he’s not the only one. They feel protective of their founders. Building companies is a depressing and lonely venture and having someone suddenly tell the world you are worth some 20% less can fuck with your psychology, ability to hire, and more. People like Graham have a bully pulpit they can use to make anyone writing about or worrying about these downgrades feel silly. Like they just don’t understand it. Stocks do this all the time! Don’t you get it?

But a few things are wrong with the logic. The first: The press and employees do obsess about a falling public stock price. So much so that LinkedIn’s CEO Jeff Weiner just gave up $14 million in compensation to give it back to employees after a disheartening 40% stock drop rocked the company. Twitter’s stock is a minute-by-minute referendum on Jack Dorsey’s part time leadership, weighing on the company and no doubt making life harder for those in sales and recruiting.

Let’s not pretend that a stock price that is down dramatically or over a sustained period isn’t considered a big deal by the investing and tech world. A newly public company is judged for being “under” its IPO price or its last private valuation, just as much as a private company who does a down round.

This reality is the reason startups are loathe to go public.

What bothers them isn’t that they are being treated differently than public companies. What bothers them-- what was a shock to many entrepreneurs last November when this trend began-- is that mutual funds publicly marking them down effectively treats them the same as a public company, but without having made the choice or reaped the benefits of having actually gone public.

Indeed, startups are not getting marked down in concert with the broader market or across the board. It’s being made on a company-by-company basis. Fidelity’s recent mark downs were mostly steeper than broader market losses, and while 19 companies got reduced, several were not. That included even decacorn companies that arguably have the farthest to fall like Airbnb, Snapchat, Uber and more. Meanwhile, the Zenefits cut was the second major cut the company has experienced, and as Dan Primack noted, it didn’t include the period where the CEO stepped down, the company lost its largest customer, and all that stuff about lawbreaking and sex in stairwells made headlines. Expect another markdown.

To characterize these markdowns a referendum on the unicorn phenomenon as a whole, simply isn’t backed up by the facts.

But even if all that weren’t the case, there is a reason we call one stock “underwater” and the other merely “down.” Because one stock is liquid and the other isn’t. Graham obviously gets the many distinctions at play here, but saying late stage private companies are “essentially public” is a clever rhetorical trick to gloss over them. In particular, to gloss over what the difference means to employees of these companies.

The value of a public company fluctuates minute by minute. Millions of people get to effectively set the price by agreeing through a huge market what they will or will not pay for a share of stock. The crowd around a public stock is so great that an investor with only a few percentage points of ownership can force a proxy battle, a spin off of a core asset, or a board to be sacked.

The value of a private company, on the other hand, is negotiated at one set moment in time between a few people. It isn’t about the company’s fundamentals, it’s about promise, potential and power. How badly someone wants to get in the deal and how many other people want the same thing. As everyone who defended these valuations on the way up knows, private deals have little to do with the value of that company. It could be about putting a hot logo on a Web site, taking a flier on something that could be huge with gigantic downside protections to make sure investors don’t lose money, or large mutual funds who also have huge stakes in Google, Facebook and the like, having some insight into potential up and coming challengers.

While one investor with a few percentage points can dramatically change policy at a large publicly traded company, one investor with several times that ownership may not even get his phone calls returned from a private company CEO.

Why does this distinction matter? Employees.

One of the biggest reasons startups have justified rounds with downside protections, reaching for valuation, and bragging about it in the media is because it makes recruiting easier. But if you’ve hired people based on the security and comfort that they’ll get working for a unicorn, it’s relevant when that company’s value subsequently gets slashed. If employees work at a publicly traded company and they lose faith, they can sell their stock (in most cases.) They have no recourse at a privately traded company.

Worse: At private companies the value of their stock is totally opaque. Few employee knows the details of the last funding round or understand what downside protections a company may have. Few employees know how much a company has to exit for in order for any of them to ever see a dime.

I’m thrilled that one of the richest investors in Silicon Valley isn’t bothered by these write downs anymore than he would be worried about a stock ticking down in a volatile market. Not everyone in tech has that luxury.

You can’t have it both ways. As I’ve written several times, I think it was incredibly foolish for startups to spend the last two years bragging about an arbitrary single term like valuations. I think it set them up for failure. But startups and their investors insisted this metric said everything about why people should bet their careers on these companies. When that same metric is slashed you don’t get to argue it’s suddenly not relevant.