Depends what you mean by subjective. The valuations are not just our internal estimates of the values of these companies. They're the post-money valuations resulting from actual investments, and at these valuations, invariably by institutional investors.
So while of course not all of these companies are going to succeed (a $40m valuation is roughly a bet that a company has a 10% chance of ending up worth a billion), the people making these investments are professionals at valuing startups, and they're betting their own future income on the accuracy of their estimates. There's always uncertainty when you have an asset appraised, especially one whose value is so hard to predict, but you can't generally get a more accurate appraisal than one by a professional who is actually willing to buy the asset at their estimate of its value.
Err I think I meant preferred shares? FOO buys in at $X valuation. If a liquidity event happens that doesn't meet price target $Y, FOO gets paid out before the previous holders altogether or at some higher percentage.
Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that.
I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly.
Grandparent poster has since clarified his question (he was talking about liquidation preferences and multiples). But yeah, back in the day, tranched rounds with company performance targets were not unusual. In fact, they're still practiced today -- typically by big corporate investors, as opposed to angels or VCs.
My personal opinion is that performance targets specifically, if not tranched payments in general, are bad for all concerned. Ostensibly they cover some downside for the investor, but startup investing is abot maximizing upside, not covering downside per se. At their worst, tranches and targets hold the company hostage to goals that are often arbitrary, and are almost always gamed accordingly. As a result, you have a company that is checking boxes and focusing on its arbitrary numbers, and you've got investors who don't realize they're creating perverse incentives. Also, it's basically impossible to run any variant of the Lean Startup methodology when under the gun of performance-based tranches.
I say this having worked for a startup that accepted big corporate money on a tranch-based system with performance goals. Total headache for all concerned.
So while of course not all of these companies are going to succeed (a $40m valuation is roughly a bet that a company has a 10% chance of ending up worth a billion), the people making these investments are professionals at valuing startups, and they're betting their own future income on the accuracy of their estimates. There's always uncertainty when you have an asset appraised, especially one whose value is so hard to predict, but you can't generally get a more accurate appraisal than one by a professional who is actually willing to buy the asset at their estimate of its value.