Both Sides of the Table

MAY 13, 2013

I’m supposed to believe that my best innovation can only come from scores of startup founders who just made millions and have now become CVOs at my company? If the money comes from professional investors it usually has a “liquidation preference” meaning that their money comes out before the founders or common stock. (If

Liquidation Preference 357

Liquidation Preference Early Stage Retention Lock-up Period 357

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. Big ambition should equate to a big opportunity to make a difference to the world and to make a lot of money. Powerful stuff.

Liquidation Preference 134

Liquidation Preference Distribution Web Conversion 134

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. Options and warrants, when issued, are also typically exercisable for shares of Common Stock.

IPO 159

IPO Equity Common Stock Stock 159

Scott Edward Walker

DECEMBER 13, 2018

The purpose of this post is briefly (i) to provide an overview of acquihires and (ii) to discuss the significant legal issues that founders must address. As discussed below, this structure exposes the founders to potential legal liability resulting from their breach of fiduciary duties as directors and/or executive officers.

Founder 45

Founder Merger IP Liquidation Preference 45

abovethecrowd.com

FEBRUARY 24, 2015

In a February 6th article in Business Insider , Allyson Shontell discovered that a mere four months after adding $150 million to a total of $330 million in invested capital, the founder and CEO disclosed to its employees that “we have spent $200 million and we have not proven out our business model.”

IPO 40

IPO Liquidation Preference Valuation Technical Review 40

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

Altgate

DECEMBER 18, 2008

@altgate Startups, Venture Capital & Everything In Between Skip to content Home Furqan Nazeeri (fn@altgate.com) ← Holiday Cards Year End Management Changes → The 3X Liquidation Preference Is Back! Let’s recap how expensive a 3x liquidation preference really is. What’s the alternative?

Liquidation Preference 31

Liquidation Preference Venture Capital Post-Money Valuation Participating Preferred 31

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. The wrong way to define “independent” is simply as “not an investor or employee.” And some founders are quite good at it too.

Term Sheet 48

Term Sheet Institutional Investors Technical Review Lead Investor 48

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. Him: Not so good. Obviously he’d be pissed off. Me: I know.

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

techcrunch.com

FEBRUARY 25, 2010

As Mark Suster recently noted , employees will never see a big payday at most startups unless the company shoots for the moon. The elephant in the room is that that founders and CEOs take almost all of it for themselves. The two founders own 33%, and split $12 million. The remaining 95 employees split 7%, each earning $27,000.

Liquidation Preference 63

Liquidation Preference Founder Option Pool Acquisition 63

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. Runway of cash.

Startup 417

Startup Dilution San Diego Stock Options 417

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

Feld Thoughts

SEPTEMBER 9, 2015

We basically doubled the number of unicorns in the past year and a half,” says Aileen Lee, the founder of Cowboy Ventures, who has herself become a mythic creature in the Valley after coining the term. If private capital is no longer available in the future, these companies will seek a public offering or acquisition.

Liquidation Preference 70

Liquidation Preference Burn Rate Balance Sheet .Net 70

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. There’s the owner—maybe a partner or two—but unless employees are offered equity from the get-go, there’s typically not a whole lot of dilution. Liquidation Preferences.

Cap Table 40

Cap Table Liquidation Preference Dilution Liquidity Event 40

abovethecrowd.com

APRIL 20, 2016

All Unicorn participants — founders, company employees, venture investors and their limited partners (LPs) — are seeing their fortunes put at risk from the very nature of the Unicorn phenomenon itself. We have already seen examples of founders and management obtaining liquidity in front of investors.

IPO 40

IPO Term Sheet Silicon Valley Valuation 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

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. There is just no way to get a good exit without a motivated management team and employee base. Regardless, I am a big fan of carve out plans.

Management 40

Management Liquidation Preference Preferred Stock Dilution 40

Both Sides of the Table

SEPTEMBER 6, 2010

We set our sites on our IPO price and then worked back to our current valuation and showed potential employees what we thought they could earn (with all legal caveats) if the company was successful. Options are obviously a very important economic motivator for your first 3-5 employees and your most senior management team.

Stock Options 294

Stock Options Stock Valuation Liquidation Preference 294

Up and Running

MAY 21, 2015

They generally also get additional rights that common shareholders don’t get, such as anti-dilution protection, and liquidation preference (discussed further below). Liquidation preference. When you hear of a company that sells for, say $10 million, most people assume that the founders are now multi-millionaires.

Covenant 60

Covenant Liquidation Preference Ratchet Dilution 60

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. Data from LinkedIn suggests all four companies had 3-5 employees.

San Francisco 110

San Francisco Hiring Liquidation Preference Aggregator 110

The Equity Kicker

DECEMBER 30, 2013

If after a $5m Series A a founder holds 30% of her company and then goes on to raise a $20m Series B at $60m pre-money her stake will drop to 22.5% but she will most likely now be sitting behind a $25m liquidation preference and have taken on new investors who want to exit the company for at least $240m (to get 3x on their investment).

Finance 129

Finance Liquidation Preference Valuation Harvest 129

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

ithacaVC

MAY 1, 2013

I read an article this morning in DealBook titled “ In Venture Capital Deals, Not Every Founder Will be a Zuckerberg “ Go ahead and give it a read. It must be paid out before the common shares, which are typically held by the founders and other employees.” But this time he missed a few things.

Dividend 45

Dividend Liquidation Preference Common Stock Venture Capital 45

Both Sides of the Table

NOVEMBER 4, 2009

BTW, this ignores liquidation preferences which actually mean you’ll earn less. He’d be employee number 3. Best to be a founder. In California that averages around 42.5% so in my state after tax you’d make an extra $18,000 / year and that’s in a positive scenario! So let’s go CRAZY!

Stock Options 418

Stock Options Stock Liquidation Preference Option Pool 418

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

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. My post looks at this from the consultant/employee point of view. what kind of stock you are getting. what your rights are. Luck plays a role in high tech start-up success. Good point.

Equity 40

Equity Technical Review San Jose Stock 40

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 grant to early employees? The second and third rounds of funding take additional shares of equity and dilute existing investors and founders. Should I take Angel or VC money?

Equity 40

Equity Employee Dilution Valuation 40

Both Sides of the Table

FEBRUARY 14, 2016

Social networking finally came of age connected the planet and leading to enormous wealth creation for Facebook employees and investors. Smart phones finally took off leading to enormous wealth creation for Apple employees and investors but also helped propel Google, Facebook, Twitter, Instagram, Snapchat, WhatsApp and others.

Valuation 150

Valuation Down Round Startup Later Stage 150

SoCal CTO

JULY 13, 2010

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. Your employees can’t also be your friends. " Is Your VC Founder Friendly? Is Your VC Founder Friendly? I’ll have to relocate. Now I have.

Cofounder 175

Cofounder Technical Cofounder Term Sheet Startup 175

www.mattbartus.com

DECEMBER 9, 2012

Perspectives on issues affecting founders, startups and investors from a veteran startup lawyer in Silicon Valley. 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. How to pump up your VC valuation. Post-Money.

Warrant 40

Warrant Valuation Pre-Money Valuation Term Sheet 40

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. It is a Latin phrase that means "on equal footing" and has been translated to mean "ranking equally", "hand in hand", and "fairly" according to Wikipedia.

Term Sheet 46

Term Sheet Silicon Valley Syndicate Syndication 46

www.paulgraham.com

APRIL 28, 2010

When youhear people talking about a successful angel investor, theyre notsaying "He got a 4x liquidation preference." The upperbound is obviously the total amount the founders want to raise.The lower bound is 5-10% of the total or $10,000, whicheveris greater. Or you canbecome a de facto employee of the company.

Angel Investor 63

Angel Investor Syndicate Syndication Dilution 63