“Unicorn” is the moniker given to a privately-held startup company that achieves a valuation of $1 billion or more. Like the mythical beasts they are named after, lofty valuations applied to unprofitable or unproven business endeavors should be exceedingly rare. Recently, however, unicorns have become relatively commonplace, especially in Silicon Valley.

In January 2014, the Wall Street Journal began tracking these unicorns. At that time, there were 43 venture capital-backed private companies with valuations of $1 billion or more, valued at a combined total of $110.7 billion. Today, that number has exploded to 131 companies worldwide. In Silicon Valley alone, there are now 48 unicorns valued at a combined total of $209.3 billion.

The dramatic increase in both the number and value of unicorns suggests that these valuations have become frothy. Recently, both private and public market valuations have started to come down at companies like Snapchat, Dropbox and Square (tkr: SQ). If the valuations being applied to unicorns are indeed fantasy, how would the various company stakeholders be affected if unicorn valuations fall?

Venture Capital Investors: One would think that the venture capital investors funding these companies at their peak valuations would be most adversely affected. Often, however, VC investors assure themselves positive return through ‘ratchet’ provisions, which force the company to issue additional shares to these investors if valuations fall in the future. Without these ratchet provisions, VC investors at the peak valuations would face a decline in the value of their holdings, although it seems that most of the time, ratchet provisions are in place.

Early Investors/Founders: Early investors and founding employees in highly-valued companies may not reap the outsized returns they might have penciled in at peak valuation. But while this would mean that they make less money, it does not necessarily mean that they lose money.

Employees: The employees of these companies who participate in the company’s success with stock issuances would see the value of their holdings diluted by the ratchet provisions negotiated by the company to secure late-stage financings.

Companies: The companies themselves rely on their valuations to secure liquidity (e.g. from an IPO), to fund future expansion projects. The companies could see their coffers diminished if valuations tumble, which would curtail their ability to expand their businesses.

Ancillary Services: Supporting services like commercial real estate, legal, and accounting have experienced an increase in demand for their services alongside the growth of these companies.

If we see a plunge in these lofty unicorn valuations, it is likely that the greatest negative impact would be felt by the employees of the companies and the demand for supporting services.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.