Historically, when people speak about unicorns they are referring to those magical white horses with long horns sprouting from their foreheads. Today, in Silicon Valley and on Wall Street, “unicorns” refer to those private companies valued at more than $1 billion. The current list of unicorns is extensive, including household names like money-losing Uber ($51.0 billion valuation), Airbnb ($25.5 billion), SnapChat ($15.3 billion), and about 150 other money-losing companies with a combined valuation of approximately a half trillion dollars (see list here). Just like the mythical unicorns we imagine and read about in fairy tales, Silicon Valley unicorns are at risk of dying off and becoming a myth as well.

Square at the Heart of the Problem

Following young technology start-ups with names like, Box, Dropbox, and Square can become quite confusing, but investors are becoming less confused about their desire for profits and fair valuations. The recent –33% discount in the planned pre-IPO offering price of Square shares to $11 – $13 ($4 billion) from the last private funding valuation of $15.46 ($6 billion) is signaling the deteriorating health of money-losing unicorns.

Adding insult to injury, money-losing Square provided recent private investors with a controversial “ratchet” clause, which essentially gives privileged investors additional shares, if the IPO (Initial Public Offering) price does not occur at a minimum set price. The net result is a fraction of advantaged investors receive a disproportionate percentage of the company’s value, while a majority of the other investors see their ownership value diluted. According to Forbes, approximately 30% of unicorns carry some contentious ratchet provisions, which may make IPO exits for these companies that much more difficult.

The recent Square news comes on the heels of other unicorns like Dropbox seeing its pre-IPO value being reduced by -24% from industry giant BlackRock Inc (BLK), an early Dropbox investor. According to the Wall Street Journal¸ bankers close to the company admitted achieving a pre-IPO valuation of $10 billion will be challenging. Subsequently, mutual fund behemoth Fidelity wrote down the value of social media, photo disappearing, mobile application company, Snapchat, by -25%.