Both Sides of the Table

FEBRUARY 23, 2015

For some aspiring to be tech entrepreneurs, I often suggest a two-step process, as I argued in this post that “ The First Startup Founder You Need to Invest in Is You.” The narrative of this discussion is something like this: I meet a 35-40-year-old founder with two kids and mortgage. He still has the dream.

Technical Review 150

Technical Review Liquidation Preference Silicon Valley IP 150

genylabs.typepad.com

SEPTEMBER 24, 2011

Working for Equity Instead of Cash. has an article on service firms waiving their fees and instead taking equity in their clients. Interest in this waned when the Internet bust resulted in most tech start-up equity becoming worthless, but it seems to be coming back. where your stock sits in the liquidity preference stack.

Equity 40

Equity Technical Review San Jose Stock 40

Both Sides of the Table

SEPTEMBER 18, 2014

At an accelerator … 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.

Venture Capital 417

Venture Capital Liquidation Preference Valuation Term Sheet 417

Both Sides of the Table

SEPTEMBER 5, 2012

This time by the efforts of Adeo Ressi to introduce a new kind of structure called “ convertible equity.” My initial reaction to Adeo when we spoke was that while it may have solved some issues (debt versus equity) it didn’t solve the ones that I’ve been warning entrepreneurs about most loudly.

Ratchet 354

Ratchet Liquidation Preference Equity Stock 354

VC Cafe

OCTOBER 31, 2022

It’s a tough time for a lot of startup founders right now. This is not meant to be a negative post, but rather a temperature check of today’s market environment and the levers founders can pull on to survive this period. What is a founder to do? Investors are trying to protect their downside.

Founder 173

Founder Technical Review Down Round Liquidation Preference 173

Startup Professionals Musings

SEPTEMBER 26, 2015

Investors, on the other hand, look at the money figure, and even the equity, as the easy part. Here is a summary of the key terms to expect on the term sheet, or the contract between the founder and investor: Consideration given for the money invested. This is a loan with an option to convert to equity at a later date.

Term Sheet 120

Term Sheet Demand Preferred Stock Liquidation Preference 120

Startup Company Lawyer

MARCH 14, 2010

After the recent announcement of the Series Seed Financing documents by Marc Andreesen, Brad Feld points out that there are now four sets of “open source&# equity seed financing documents: TechStars Model Seed Funding Documents (by Cooley). Y Combinator Series AA Equity Financing Documents (by WSGR). under $500K).

Finance 70

Finance Software Review Term Sheet Liquidation Preference 70

The Equity Kicker

OCTOBER 22, 2012

That’s exciting and motivating for founders, and makes it easier to enlist support for your mission from investors, new employees and customers and will get you talked about on blogs and at cocktail parties. It’s important but sometimes misunderstood, and occasionally gets in the way of success. A reminder of the pros. Powerful stuff.

Liquidation Preference 134

Liquidation Preference Distribution Web Conversion 134

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. But lawyers will charge much more for equity.”

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

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. For more background, see Revenue-Based Investing: A New Option for Founders who Care About Control. Optionality.

Revenue 60

Revenue Liquidation Preference Equity Cofounder 60

Scott Edward Walker

APRIL 22, 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? and (ii) what happens if the maturity date is reached prior to the note’s conversion to equity? Note: This post was originally published on TechCrunch.] What Is a Conversion Discount? million in 2011.

Pre-Money Valuation 72

Pre-Money Valuation Finance Liquidation Preference Founder 72

K9 Ventures

NOVEMBER 21, 2011

Let’s say you’re the founder (I use a solo-founder in my example to keep things simple, but this could just as well apply to a founding team) of a startup called Blood, Sweat and Tears, Inc. The objective is really to be able to get some risk off the table for the founders and not leave all their eggs in one basket.

Founder 87

Founder Common Stock Preferred Stock Stock 87

K9 Ventures

NOVEMBER 21, 2011

Let’s say you’re the founder (I use a solo-founder in my example to keep things simple, but this could just as well apply to a founding team) of a startup called Blood, Sweat and Tears, Inc. The objective is really to be able to get some risk off the table for the founders and not leave all their eggs in one basket.

Founder 84

Founder Common Stock Preferred Stock Stock 84

Startup Professionals Musings

JANUARY 27, 2012

Define equity type. The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Term Sheet 223

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

Up and Running

AUGUST 17, 2015

Legal Aspects of Entrepreneurship: While the exact title and contents of this class may vary depending on the business school you attend, as a first time founder, it’s incredibly important to understand all of the legal considerations around starting your own company (e.g., It helps mitigate startup risk.

Entrepreneur 60

Entrepreneur Cofounder Angel Investor eCommerce 60

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. See Also How to Negotiate with Prospective Investors.

Covenant 60

Covenant Liquidation Preference Ratchet Dilution 60

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

Startup Professionals Musings

SEPTEMBER 14, 2010

Define equity type. The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Term Sheet 227

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

techcrunch.com

FEBRUARY 25, 2010

This is probably why investors’ case for a company to sell early f ocuses exclusively on the founder : in most early-stage acquisitions, the liquidation preferences and deal-sweeteners only work for investors and founders. The elephant in the room is that that founders and CEOs take almost all of it for themselves.

Liquidation Preference 63

Liquidation Preference Founder Option Pool Acquisition 63

Feld Thoughts

JUNE 2, 2015

Or, if you just want the paragraph, it’s: “If this note converts at a price higher than the cap that you have been given you agree that in the conversion of the note into equity you agree to allow your stock to be converted such that you will receive no more than a 1x non-participating liquidation preference plus any agreed interest.”.

Liquidation Preference 70

Liquidation Preference Cap Table Angel Investor Post-Money Valuation 70

Both Sides of the Table

SEPTEMBER 2, 2009

If a company has reached a level of success, has been around for a few years and you believe the company has potential to break out into a much bigger company then you should let the founders take money off of the table. The VCs basically have liquidity in management fees along the way, in the sense they get paid decently along the way.

Founder 329

Founder Liquidation Preference Term Sheet Participating Preferred 329

ithacaVC

JUNE 3, 2015

Post-Money Confusion with Convertible Notes “ Mark’s post warned of the often unintentional punishment that founders inflict on themselves when doing a convertible debt deal that contains a valuation cap. Each share of Series A will have a liquidation preference of $1.00 (assuming 1X preference, which is normal).

Liquidation Preference 40

Liquidation Preference Pre-Money Valuation Dilution Valuation 40

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. I have posted a few times on management carve out plans (back in February 2011 and November 2011 ; wow, time flies!!).

Management 40

Management Liquidation Preference Preferred Stock Dilution 40

Gust

OCTOBER 17, 2011

Define equity type. The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Term Sheet 158

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

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. An uncapped convertible note misaligns the incentives between the founders and the investors/note holders.

Pre-Money Valuation 132

Pre-Money Valuation Valuation Equity Liquidation Preference 132

Scott Edward Walker

APRIL 9, 2012

As a result, the pendulum has swung dramatically in the founders’ favor, and the issuance of convertible notes for seed financing has never been more prolific. 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) What is a Convertible Note?

Preferred Stock 87

Preferred Stock Finance Common Stock Liquidation Preference 87

ithacaVC

DECEMBER 13, 2013

They are typically pretty simple: (i) shares owned by founders and (ii) shares authorized for issuance in a stock option pool, some of which may be issued to employees already and some of which will be available for future issuance. If no additional equity is ever granted to Founder X and Founder Y, then Founder Y will ALWAYS own 1.63

Cap Table 67

Cap Table Pre-Money Valuation Option Pool Liquidation Preference 67

The Startup Lawyer

JUNE 9, 2010

A startup’s Series A financing shouldn’t be a large liquidity event or salary payday for the startup’s founders. While a startup typically receives millions of dollars in a Series A, if too much of that $$$ flows guaranteed to the founders, various incentives get out of whack. Case Study.

Salary 99

Salary Term Sheet Liquidation Preference Liquidity Event 99

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

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

Spencer Fry

APRIL 17, 2017

As a bootstrapped startup, the only accountability you have is to yourself and to your co-founder if you have one. How much and at what terms, is up to the deal you strike with your investors, but you can’t take money without giving away equity. These are all things that, in 2017, can’t be overlooked as “I’ll get to them eventually”.

Bootstrapping 63

Bootstrapping Cap Table Liquidation Preference Cofounder 63

Gust

MAY 24, 2012

Some commentators have suggested this is the wave of the future, signifying a shift in the balance of power from investors to founders of the relatively small, elite group of growth companies that make it to public markets. Nevertheless, these preferences aren’t intended to last forever.

IPO 159

IPO Equity Common Stock Stock 159

The Equity Kicker

AUGUST 1, 2012

This analysis assumes there was no participating liquidation preference and lumps together companies that have raised money with those that haven’t, but I think it is fair to guess that in aggregate the investors in these companies didn’t get what they set out for. Lightbox and Karma had raised money $5.7m

San Francisco 110

San Francisco Hiring Liquidation Preference Aggregator 110

ithacaVC

NOVEMBER 12, 2011

Typically, with convertible debt, the note holder expects the debt to convert into the next equity financing (often a Series A round). So, the debt holder ends up with Series A stock with a $1 value (and usually a 1X liquidation preference, in this hypo $1) for $.85. 85 a share (just divide the debt amount plus interest by $.85).

Warrant 49

Warrant Liquidation Preference Equity Stock 49

Growthink Blog

MAY 23, 2011

An entrepreneur starts a company in classic " bootstrap " fashion - with a combination of sweat equity and their own financial resources. The typical wisdom regarding the appropriate financing course for a new company goes as follows: 1. But here is the key – contrary to popular wisdom it is negatively correlated.

Angel Investor 112

Angel Investor Venture Capital Sweat Equity Cram Down 112

VC Adventure

AUGUST 30, 2010

Paul Graham, founder of Y-Combinator , sent out a tweet on Friday saying: “Convertible notes have won. 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.

Angel Investor 103

Angel Investor Early Stage Equity Valuation 103