Scott Edward Walker

JUNE 9, 2011

As many of you know, VC investors are typically issued shares of preferred stock, not common stock. Indeed, preferred stock, as the name suggests, is preferable to (and more valuable than) common stock because it grants certain key rights to the holders, one of which is a conversion right.

Term Sheet 60

Term Sheet Conversion Rights Venture Capital Liquidation Preference 60

Scott Edward Walker

APRIL 9, 2012

In other words, investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive shares of preferred stock as part of the startup’s initial preferred stock financing, based on the terms of the note.

Preferred Stock 87

Preferred Stock Finance Common Stock Liquidation Preference 87

Scott Edward Walker

APRIL 22, 2012

The math can be tricky, but the bottom line is that noteholders without a cap do not share in any increase in the value of the startup prior to the Series A round. Accordingly, the noteholders would receive an extra $2 million of liquidation preference. What is the Typical Interest Rate and How Do the Investors Get Paid?

Pre-Money Valuation 72

Pre-Money Valuation Finance Liquidation Preference Founder 72

www.mattbartus.com

DECEMBER 9, 2012

Prior to the VC’s exercise of the warrants, the founders will actually own 67% of the issued shares because the warrant shares are not outstanding until the warrants are exercised. I've just seen many startups unhealthily focus on the valuation versus things such as the liquidation preference or board control.

Warrant 40

Warrant Valuation Pre-Money Valuation Term Sheet 40