Startup Professionals Musings

SEPTEMBER 26, 2015

Investors, on the other hand, look at the money figure, and even the equity, as the easy part. This is a loan with an option to convert to equity at a later date. For later investments, the price is equity, with a percentage of the owner stock to be assigned to the investor. Terms to prevent equity dilution relative to others.

Term Sheet 120

Term Sheet Demand Preferred Stock Liquidation Preference 120

Board Effect

MAY 10, 2019

Such metrics can include an investor’s liquidation preference, option exercise windows and expiry dates, and shareholders’ fully diluted ownership percentages. It’s important to note that the structure and contents of a cap table are unique to how a company has chosen to divide its equity. Why do cap tables matter?

Cap Table 40

Cap Table Liquidation Preference Dilution Liquidity Event 40

Startup Professionals Musings

JANUARY 27, 2012

Define equity type. Venture capitalists and later round investors like the preferred convertible shares. Anti-dilution protection. But some dilution is almost inevitable. Liquidation preference. But the lead Angel would certainly ask to be given a seat. Right of first refusal.

Term Sheet 223

Term Sheet Pre-Money Valuation Due Diligence Post-Money Valuation 223

Both Sides of the Table

APRIL 14, 2010

That means that the likely have a minimum of $15 million in liquidation preferences. It will usually be higher because the liquidation preference has a dividend so if the deal is long in the tooth assume that the liquidation preference might be $20-22 million. Take liquidation preferences head on.

Venture Capital 289

Venture Capital Liquidation Preference Common Stock Dividend 289

Gust

SEPTEMBER 17, 2014

Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. Me: More dilution? Try doing THAT with equity.

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

Up and Running

MAY 21, 2015

All the other sharks typically make a traditional equity investment; for example they’ll invest $100,000 at a $1,000,000 business valuation, and take 10 percent of the business. That’s called a traditional equity investment. Preferred versus common shares. Anti-dilution protection.

Covenant 60

Covenant Liquidation Preference Ratchet Dilution 60

Startup Professionals Musings

SEPTEMBER 14, 2010

Define equity type. Venture capitalists and later round investors like the preferred convertible shares. Anti-dilution protection. But some dilution is almost inevitable. Liquidation preference. But the lead angel would certainly ask to be given a seat. Right of first refusal.

Term Sheet 227

Term Sheet Pre-Money Valuation Due Diligence Post-Money Valuation 227

Tim Keane

JANUARY 12, 2010

The investors and the entrepreneurs are – or should be – aware that the price of the company’s equity is set by the market – in simplest terms, what an informed buyer is willing to pay.   Note that this applies only to earl stage Series A-type equity financings and assumes no cash dividends are paid to investors.

Term Sheet 68

Term Sheet Valuation Dividend Liquidation Preference 68

David Teten

AUGUST 21, 2019

Most founders who are raising capital look first to traditional equity VCs. Revenue-Based Investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. Should you raise venture capital from a traditional equity VC or a Revenue-Based Investing VC? Less or no dilution.

Revenue 60

Revenue Liquidation Preference Equity Cofounder 60

ithacaVC

JUNE 3, 2015

The punishment comes in the form of “unjust” liquidation preference that the note holders end up with when they convert at a valuation cap that is way lower than the valuation of the actual round. per share (calculated by taking $10mm premoney valuation/10mm shares outstanding fully diluted = $1.00). 70 a share!!

Liquidation Preference 40

Liquidation Preference Pre-Money Valuation Dilution Valuation 40

The Equity Kicker

JANUARY 18, 2013

What on earth does this termsheet mean with it’s liquidation preferences, anti-dilution and protective provisions? For example, liquidation preferences are financial structures whereby rather than just getting a share of the company investors get their money back first and then get a share of the company on top.

Liquidation Preference 159

Liquidation Preference Venture Capital Dilution Video 159

ithacaVC

JUNE 29, 2018

Our portfolio companies routinely adopt carve out plans when the founders/employees equity values are not likely to provide enough incentive to get a company to an exit. This typically results when the company has raised a lot of money and the preferred stock liquidation preference would absorb an out sized portion of the exit proceeds.

Management 40

Management Liquidation Preference Preferred Stock Dilution 40

Gust

OCTOBER 17, 2011

Define equity type. Venture capitalists and later round investors like the preferred convertible shares. Anti-dilution protection. But some dilution is almost inevitable. Liquidation preference. But the lead angel would certainly ask to be given a seat. Right of first refusal.

Term Sheet 158

Term Sheet Pre-Money Valuation Due Diligence Post-Money Valuation 158

The Equity Kicker

MARCH 3, 2016

All of the deals had a liquidation preference of 1x or more. However, few of the deals went beyond a simple 1x non-participating preference share. I always wondered if companies were accepting multiple liquidation preferences in exchange for high valuations, but that was only the case in 3% of the deals analysed.

Liquidation Preference 60

Liquidation Preference Participating Preferred Valuation IPO 60

Feld Thoughts

JULY 14, 2015

Assuming equity is raised at or above that cap, the total dilution, before the new money, is 16.6% (equivalent to an equity financing of $1m at a $6m post money valuation. The new money comes in at a pre-money valuation of $100, but includes a complete refresh of founder equity to 40% of the company.

Recapitalization 70

Recapitalization Pre-Money Valuation Post-Money Valuation Angel Investor 70

ithacaVC

DECEMBER 13, 2013

VCs in particular typically insist on a slug of available options counting in the pre-money share total as they do not want to be diluted later by the issuance of those options. On a fully diluted pre-money basis, that would mean the option pool represents 14.5% (356,758/2,456,758) of the cap table. times more equity than Founder X.

Cap Table 67

Cap Table Pre-Money Valuation Option Pool Liquidation Preference 67

ithacaVC

FEBRUARY 23, 2011

The MCOP can serve a critical role as founders and other management team members are diluted down by rounds of financing or if their equity is not in the money. As the investors’ aggregate liquidation preference (ALP) increases typically the need for a MCOP also increases. A few key points to consider: 1.

Liquidation Preference 55

Liquidation Preference Management Preferred Stock Dividend 55

Startup Company Lawyer

JANUARY 9, 2011

One super-angel I talked to told me that while a year ago these caps “approximated what I’d pay in equity” that they’re now “33% higher than what I’d normally agree to pay now.”. A logical alternative to convertible debt is a priced Series A preferred stock financing.

Liquidation Preference 57

Liquidation Preference Finance Preferred Stock Common Stock 57

The Startup Lawyer

JUNE 9, 2010

The startup community focuses most of the term sheet discussion on liquidation preferences and anti-dilution , but startup CEO salary is nonetheless an important issue. It aligns his interest with the equity holders. The Importance of Startup CEO Salary. The CEO’s salary sets a cap for everyone else.

Salary 99

Salary Term Sheet Liquidation Preference Liquidity Event 99

dondodge.typepad.com

JANUARY 15, 2011

Community is more powerful than money or technology » August 11, 2007 How much equity for investors and employees? How much equity should I give up? How much equity should I grant to early employees? No loss of equity, at least until they convert at Series A. How much equity should be given to employees?

Equity 40

Equity Employee Dilution Valuation 40

Scott Edward Walker

APRIL 9, 2012

Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note’s conversion to equity? (ii) ii) what happens if the maturity date is reached prior to the note’s conversion to equity? A convertible note is short-term debt that converts into equity. What is a Convertible Note?

Preferred Stock 87

Preferred Stock Finance Common Stock Liquidation Preference 87

K9 Ventures

MARCH 23, 2011

I may be well be in the minority in the Valley to think this way — especially so as a seed stage investor — but I have a strong preference for doing priced equity rounds for funding companies at any stage. It is in essence equivalent to being a Liquidation Preference that is typically seen in a preferred equity financing.

Pre-Money Valuation 132

Pre-Money Valuation Valuation Equity Liquidation Preference 132

Startup Company Lawyer

JANUARY 31, 2011

Automatic conversion: on a $1M equity financing with no conversion discount and no price cap , provided that the transaction documents provide for a right to purchase a pro rata share of future financings. (I Optional maturity conversion : into Series AA Preferred Stock based on a $5M valuation.

Preferred Stock 60

Preferred Stock Liquidation Preference IPO Common Stock 60

VC Adventure

AUGUST 30, 2010

First a quick terminology recap (skip this paragraph if you’re already familiar with convertible debt vs. preferred equity). The most common forms of investment in early stage business are convertible debt and preferred equity. Historically convertible debt has been easier (and therefore cheaper) to put in place.

Angel Investor 103

Angel Investor Early Stage Equity Valuation 103

Babbling VC

AUGUST 31, 2010

R ight now there is a discussion going on in the VC blogs about doing straight equity deals verses issuing convertible debt. Terms like "drag-along", "liquidation preference" and "anti-dilution" tend to be triggers for the thought of "I'm getting screwed!" That's not the point of this post though.

Liquidation Preference 62

Liquidation Preference Semantic Dilution Reputation 62

abovethecrowd.com

APRIL 20, 2016

It will also minimize future dilution. I get that you want to grow and I want you to grow, but let’s internally finance that growth by spending gross margin dollars rather than new dilutive dollars of equity. So how will you ever get liquid? Now you make your own decisions. ” Go public.

IPO 40

IPO Term Sheet Silicon Valley Valuation 40

www.mattbartus.com

DECEMBER 9, 2012

If you are a company that is fundraising, keep in mind that there are a few different levers you can pull to change the amount of dilution that the founders will experience. Let’s say you receive a term sheet for a $1 million investment at a $3 million fully diluted pre-money valuation, and you’re kind of disappointed.

Warrant 40

Warrant Valuation Pre-Money Valuation Term Sheet 40

ithacaVC

JUNE 28, 2011

Let’s assume that future equity financings will be needed as usually is the case. So, if a shareholder did not participate in the Series B, the holder’s Series A stock might convert to common stock or lose certain key provisions like liquidation preference.

Warrant 53

Warrant Common Stock Liquidation Preference Institutional Investors 53

Pascal's View

DECEMBER 30, 2012

Wasserman concludes, backed up by a data set of 10,000 companies compiled over 9 years, that the entrepreneur’s most common choices are the wrong ones, particularly co-founding with friends and splitting equity equally among co-founders at the outset of the new venture.

Cofounder 34

Cofounder Liquidation Preference Vesting Equity 34

K9 Ventures

NOVEMBER 21, 2011

Additionally, the company now just added on additional liquidation preferences — but this may be acceptable since the founders are likely to be the largest holders of the Common. 3) In some cases, if the founders, or their lawyers had enough foresight, some portion of the founders stock may have been issued as Preferred Stock.

Founder 87

Founder Common Stock Preferred Stock Stock 87

K9 Ventures

NOVEMBER 21, 2011

Additionally, the company now just added on additional liquidation preferences — but this may be acceptable since the founders are likely to be the largest holders of the Common. 3) In some cases, if the founders, or their lawyers had enough foresight, some portion of the founders stock may have been issued as Preferred Stock.

Founder 84

Founder Common Stock Preferred Stock Stock 84

Both Sides of the Table

FEBRUARY 14, 2016

In the case of startups the “buyer” is the VC looking to part cash for “purchasing” equity in your startup. Plus, down rounds trigger anti-dilution provisions. Or down rounds might favor earlier-stage investors because the liquidation preferences of later stage investors get reduced.

Valuation 150

Valuation Down Round Startup Later Stage 150

www.paulgraham.com

APRIL 28, 2010

When youhear people talking about a successful angel investor, theyre notsaying "He got a 4x liquidation preference." Dilution is normal. They cant dilute you without diluting themselves justas much. And they wont dilute themselves unless they end up net ahead. So its your choicewhether you get diluted. [

Angel Investor 63

Angel Investor Syndicate Syndication Dilution 63

Professor VC

JULY 25, 2013

In investment parlance, it strictly means that new classes of stock have equal rights with prior classes in terms of liquidation preference, voting rights, etc. Another closely related area is that of variable pricing on convertible debt or equity deals where different investors have different caps.

Term Sheet 46

Term Sheet Silicon Valley Syndicate Syndication 46

Life Beyond Code

SEPTEMBER 27, 2011

Once the $1 million revenue milestone is crossed, entrepreneurs find it easier to find additional customers, manage working capital, and access funding, whether it is credit or equity. In my roundtables, the vast majority of entrepreneurs I work with are in this rather vulnerable pre $1 million revenue stage.

Programming 116

Programming Silicon Valley Bootstrapping Technical Review 116