Scott Edward Walker

APRIL 22, 2012

This part 2 will address the economics of a convertible note seed financing and the three key economic terms: (i) the conversion discount, (ii) the conversion valuation cap and (iii) the interest rate. 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?

Pre-Money Valuation 72

Pre-Money Valuation Finance Liquidation Preference Founder 72

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

Both Sides of the Table

SEPTEMBER 5, 2012

Because convertible debt deals often have both a ‘full ratchet’ and often have ‘multiple liquidation preferences’ “ Yup. In fact, most early investor work hard to help their startups get to the next level so it makes no sense for the angel investor and founders to be at odds. That’s right.

Ratchet 354

Ratchet Liquidation Preference Equity Stock 354

Both Sides of the Table

FEBRUARY 15, 2016

How much your company should burn should also have a direct correlation with whom your existing investors are and I strongly advise that you have open conversations with them about their comfort levels and also the level of support you are likely to receive going forward. And recaps hurt founders so often people just avoid doing them.

Burn Rate 150

Burn Rate Cap Table Valuation Software Review 150

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. These are all real conversations. My colleague: Whoa.

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

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

Startup Professionals Musings

JANUARY 27, 2012

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. Liquidation preference.

Term Sheet 223

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

Tim Keane

JANUARY 12, 2010

.   At the financial level , and assuming a harvest of the investment in the company without the need for further financing, two terms stand out as driving economics: the dividend and the liquidation preference. Second a liquidation preference and a participation.   First , dividends.

Term Sheet 68

Term Sheet Valuation Dividend Liquidation Preference 68

Startup Professionals Musings

SEPTEMBER 14, 2010

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. Liquidation preference.

Term Sheet 227

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

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

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. Bottom line: the note holder chooses whichever option gives a lower price for conversion. So, the note holders pay $.30

Liquidation Preference 40

Liquidation Preference Pre-Money Valuation Dilution Valuation 40

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. But should they? Optionality.

Revenue 60

Revenue Liquidation Preference Equity Cofounder 60

Both Sides of the Table

SEPTEMBER 28, 2013

For starters let me use “CEO” as a proxy to include her “inner circle” which might mean co-founders or might just mean senior execs of the business. The Mind of the Founder. The mind of a founder is wired differently than most people. The startup CEO was not the original founder.

Startup 417

Startup Dilution San Diego Stock Options 417

Gust

OCTOBER 17, 2011

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. Liquidation preference.

Term Sheet 158

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

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

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

Scott Edward Walker

SEPTEMBER 14, 2011

It is important for founders to understand that VC term sheets are usually deemed to be “non-binding” (other than perhaps a few provisions, such as the “no-shop” provision and legal fees and expenses). What Are the Key Issues for Founders? Fourth, founders should button-down all of the key issues in the term sheet.

Term Sheet 76

Term Sheet Due Diligence Liquidation Preference Redemption 76

K9 Ventures

MARCH 23, 2011

An uncapped convertible note misaligns the incentives between the founders and the investors/note holders. The founders’ interest is to maximize the valuation of the company at the time of a follow-on financing, thereby minimizing founder dilution. Here are the reasons why I don’t like convertible notes: 1.

Pre-Money Valuation 132

Pre-Money Valuation Valuation Equity Liquidation Preference 132

genylabs.typepad.com

SEPTEMBER 24, 2011

where your stock sits in the liquidity preference stack. what rights and preferences the founders and the other investors have. You can follow this conversation by subscribing to the comment feed for this post. what kind of stock you are getting. what your rights are. TrackBack URL for this entry: [link].

Equity 40

Equity Technical Review San Jose Stock 40

Scott Edward Walker

JULY 7, 2011

Upon a redemption request from the holders of the required percentage of the Series A Preferred, all Series A Preferred shares shall be redeemed [(except for any Series A holders who affirmatively opt-out)].” What Are the Key Issues for Founders? Again, the founders should push back hard.

Term Sheet 49

Term Sheet Redemption Venture Capital Preferred Stock 49

ithacaVC

NOVEMBER 12, 2011

And, typically, the note holder is given a discount on the conversion price. 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. Conversion Discount vs Warrant Coverage. 85 a share (just divide the debt amount plus interest by $.85).

Warrant 49

Warrant Liquidation Preference Equity Stock 49

Scott Edward Walker

JULY 27, 2011

Indeed, whether a minority common stockholder is a founder, an advisor or even a friends/family investor, such stockholder will usually not be contractually granted any of the rights that are typically granted to preferred stockholders.

Delaware 49

Delaware Liquidation Preference Redemption Los Angeles 49

thestartuplawyer.com

FEBRUARY 24, 2010

He obviously never launched a startup and got shafted by a co-founder. He obviously never launched a startup and got shafted by a co-founder. You can start by examining every aspect of the co-founder relationship. do not think being friends or relatives reduces the need for these difficult and/or awkward conversations.

Cofounder 40

Cofounder Founder Preferred Stock Startup 40

Hunter Walker

NOVEMBER 23, 2015

I was one of the founders of Upstartle, had the idea and wrote the first version of Writely (I was interested in experimenting with what was then called AJAX and some new browser capabilities around text editing). I also did the obvious conversation about how it’s the starting line not the finish line.

Engineer 48

Engineer Liquidation Preference AJAX IPO 48

Pascal's View

DECEMBER 30, 2012

While every company founder makes trade-offs in building a company, few entrepreneurs appreciate the far-reaching implications of several critical decisions they will are required to make at the outset of a startup’s evolution. Most founders tend to make decisions with no process, based on their gut instincts.

Cofounder 34

Cofounder Liquidation Preference Vesting Equity 34

SoCal CTO

JULY 13, 2010

" 8 Questions to Ask When Interviewing at a Startup - Instigator Blog , June 18, 2010 Job interviews are meant to be conversations. One of the highlights of my trip was a startup dinner which included Jason Fried and David Heinemeier Hansson, the founders of 37signals. liquidation preference. I’ll have to relocate.

Cofounder 175

Cofounder Technical Cofounder Term Sheet Startup 175

VC Adventure

AUGUST 30, 2010

Paul Graham, founder of Y-Combinator , sent out a tweet on Friday saying: “Convertible notes have won. The most common forms of investment in early stage business are convertible debt and preferred equity. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”.

Angel Investor 103

Angel Investor Early Stage Equity Valuation 103

Scott Edward Walker

JUNE 9, 2011

Conversion Rights What Are Conversion Rights? As many of you know, VC investors are typically issued shares of preferred stock, not common stock. A conversion right is the right to convert shares of preferred stock into shares of common stock. There are two types of conversion rights: optional and mandatory.

Term Sheet 60

Term Sheet Conversion Rights Venture Capital Liquidation Preference 60

abovethecrowd.com

FEBRUARY 24, 2015

Lost in this conversation are the dramatic differences between a high priced private round and an IPO. Conversely, these late stage private rounds have no such pageantry or process. Most private company financings involve the use of preferred stock with liquidation preferences.

IPO 40

IPO Liquidation Preference Valuation Technical Review 40

Austin Startup

AUGUST 1, 2017

This is most clearly highlighted in the “unicorn” boom we all saw over the past few years, where founders raised very large rounds, with terms very onerous to the underlying common stock, hoping they could eventually justify billion dollar valuations to skeptical acquirers or public market investors.

Liquidation Preference 48

Liquidation Preference Common Stock Valuation Silicon Valley 48

Austin Startup

APRIL 1, 2017

out of state VCs Don’t rush a term sheet In assessing financing terms and interacting with their lead investors, most founders instinctively focus on two core things: economics and control. And some founders are quite good at it too. Background Reading: How to avoid “captive” company counsel Local v. Yes, this happens. It’s experience.

Term Sheet 48

Term Sheet Institutional Investors Technical Review Lead Investor 48

Life Beyond Code

SEPTEMBER 27, 2011

When we were looking to talk to investors, Sramana introduced us to multiple investors and acted as an advisor helping us to navigate complex term sheet clauses like tranche financing and liquidation preferences. Numerous lessons. RS: Thanks Sramana. Please check out more at 1M/1M website. 1m1m.sramanamitra.com.

Programming 116

Programming Silicon Valley Bootstrapping Technical Review 116