More on Liquidation Preferences

Altgate

→ More on Liquidation Preferences Posted on December 16, 2010 by admin A long time ago I had asked a VC about what pre-money valuation he was planning to put in a term sheet he had promised to send over. But first, let’s look at pre-money valuation by liquidation preference.

VC Rights: Up, Down, And Know What The Fuck Is Going On

Feld Thoughts

Down: Liquidation preference. Entrepreneurs – don’t get confused by the endless mumbo-jumbo. Term Sheet board seat liquidation preference pro-rata terms VCAt the HBS VC Alumni event I was at last week (no – I didn’t go to HBS – I was a panelist) I heard a great line from a wise old VC who has been a VC about as long as I’ve existed on this planet.

Everything You Ever Wanted to Know About Convertible Note Seed Financings (But Were Afraid To Ask) – Part 1

Scott Edward Walker

ii) why are convertible notes issued instead of shares of common or preferred stock? In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing.

Doing Deals – 3 Tips for Entrepreneurs (Part 2)

Scott Edward Walker

Introduction I’ve been doing deals as a corporate lawyer for 17+ years, and there are certain fundamental mistakes that I’ve seen entrepreneurs make over and over again. Most entrepreneurs, on the other hand, become emotionally wedded to a particular deal (similar to a first-time homebuyer) and are unable to maintain their objectivity – particularly as they move further along in the process. It is critical that entrepreneurs understand this dynamic.

VC Term Sheets – Investors’ Option to Walk

Scott Edward Walker

I have previously discussed this issue in detail, and the importance of choosing solid investors, in my post “ Doing Deals In The New Decade: 7 Tips For Entrepreneurs ” (see tip #1).

Top Ten Posts in 2011

Scott Edward Walker

House Passes Crowdfunding Bill: FAQ’s For Entrepreneurs 3. What Is A Liquidation Preference? What Makes A Great Entrepreneur? Miscellaneous antidilution crowdfunding legal checklist liquidation preference no shop startup startups term sheetsBelow is a list of my top ten posts in 2011 based solely on pageviews. Indeed, I was inspired by Chris Dixon and his post of last night (which you should definitely check-out).

One Simple Paragraph Every Entrepreneur Should Add to Their Convertible Notes

Both Sides of the Table

I’m so tired of seeing young entrepreneurs get screwed by their angel investors on convertible notes and I know I can’t convince you not to do it so I’d like to offer one simple bit of advice to help you avoid getting screwed (at least on one part of your note). You raise a series of notes over 18 months and eventually are fortunate enough to raise $5 million at a $25 million valuation (this investor owns 16.67% and will likely have a 1x liquidation preference).

Should I Use My Investor’s Lawyer?

Scott Edward Walker

Introduction This post was originally part of the “ Ask the Attorney ” series which I am writing for VentureBeat (one of my favorite websites for entrepreneurs). We’re first time entrepreneurs, and we don’t know if this is standard practice and what we should do. Conclusion There is too much at stake for entrepreneurs not to be represented by a smart, unbiased lawyer, who has no vested interest in the closing of a proposed financing.

Should Entrepreneurs Attend Business School?

Up and Running

As I read stories of college dropouts who had successfully sold tech companies, or entrepreneurs with innovative ideas who made it big on Shark Tank, it became clear that there was no set path to startup success. Do you think entrepreneurs should go to business school?

One Book Every Entrepreneur and VC Should Own

Both Sides of the Table

tl;dr version: If you’re an entrepreneur or VC or will be working in this industry - buy this. To this day I’m still surprised how few CEOs really understand the differences between 2x liquidation preference and a liquidation preference with a 2x cap.

Founders – Use Your Down Round To Clean Up Your Cap Table

Feld Thoughts

And, rather than rational and helpful thoughts for entrepreneurs, it often brings out the schadenfreude in even the most talented people. We entrepreneurs have been spinning that line for decades in every boom cycle. I’ve seen every imaginable type of liquidation preference structure, pay-to-play dynamic, preferred return, ratchet, share/option bonus, option repricing, and carveout. Then use the down round to clean up your preference overhang.

The Pre-money vs. Post-money Confusion With Convertible Notes

Feld Thoughts

The other day, Mark Suster wrote a critically important post titled One Simple Paragraph Every Entrepreneur Should Add to Their Convertible Notes. 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.”.

The Truth About Convertible Debt at Startups and The Hidden Terms You Didn’t Understand

Both Sides of the Table

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. ” And some seed stage investors told me, “I prefer not to fight over price now.

A first-time founder’s guide to term sheets: Equity investments, continued

The Next Web

Let’s dig into the remaining set of terms entrepreneurs can typically find in an equity-round term sheet, which the first post didn’t cover. The terms Liquidation preference: a very important clause… This story continues at The Next Web. Entrepreneur Analysis and Opinion

What is appropriate for Investor’s Contracts?

Gust

So my suggestion here is that (a) you accept the fact that in exchange for the 15K investment you are paying a 20K liquidation preference and 10% of the gross revenue, and that such payments and repayment will inure to the benefit of your investor and his estate, and (b) that you immediately go to a lawyer, and have the lawyer re-draft your agreement to supersede the home-grown one that you are now using. Invested Interests business entrepreneur investor contract startup

6 Unexpected Burdens That Come With Outside Investors

Startup Professionals Musings

As an angel investor to startups, I’m still surprised to find entrepreneurs who expect investors to give them money, and assume no strings attached. In reality, when you take someone else’s money, your job as an entrepreneur gets even tougher and riskier than before.

6 Of The Best Reasons For Declining Investor Funding

Startup Professionals Musings

As an angel investor to startups, I’m still surprised to find entrepreneurs who expect investors to give them money, and assume no strings attached. In reality, when you take someone else’s money, your job as an entrepreneur gets even tougher and riskier than before.

7 Investor Term Sheet Demands Startups Need Not Fear

Startup Professionals Musings

Most entrepreneurs looking for an investor can tell you how much money they need, but few have given much thought to what they are willing to give up for it. Investors typically demand preferred stock, to give themselves certain voting and liquidation privileges over later shareholders.

Common Stock vs. Preferred Stock in Venture Funding Transactions

Growthink Blog

I get the same question a lot from entrepreneurs raising equity capital (venture capital or angel funding). The question is whether they need to issue common or preferred stock. The answer depends on how and what rights are defined in the preferred stock.

Convertible Debt Revisited

ithacaVC

The first was Mark Shuster’s post titled “ One Simple Paragraph Every Entrepreneur Should Add to Their Convertible Notes ” and the second was Brad Feld’s post titled “ The Pre-Money vs. 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. per share liquidation preference.

Want to Raise Venture Capital More Easily? Clean Up Your Own Shite First

Both Sides of the Table

It’s meant to be a bit provocative but the reality is that I give this advice to entrepreneurs all the the time and I usually leave the “e&# off of the end. I normally offer this advice in the capacity of really wanting to help entrepreneurs so please bear with me.

Want to Know How VC’s Calculate Valuation Differently from Founders?

Both Sides of the Table

Things like “ participating preferred stock &# in legalese unsurprisingly never actually call out, “hey, this is the participating preferred language.&# We got a3x participating liquidation preference with interest (not participating with a 3x cap, but 3x participating.

Startup Investor Money Always Comes With Strings

Startup Professionals Musings

As an Angel investor to startups, I’m still surprised to find entrepreneurs who expect investors to give them money, and then disappear into the sunset. In reality, when you take someone else’s money, your job as an entrepreneur gets even tougher and riskier than before.

Raise the right amount of money for your opportunity

The Equity Kicker

Otherwise the investors won’t make the multiple on their investment that they want and after liquidation preferences are paid the amount left for the entrepreneur may well also be disappointing.

Bad Notes on VC

Gust

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. Convertible notes have both features in them but for some reason entrepreneurs don’t understand it. It’s like we need a finance 101 course for entrepreneurs. This week. On the phone ….

Bad Notes on Venture Capital

Both Sides of the Table

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. Convertible notes have both features in them but for some reason entrepreneurs don’t understand it. This week.

Keep Term Sheets Simple for Quicker Cash to Spend

Startup Professionals Musings

Entrepreneurs sometimes assume an initial agreement with an Angel is a commitment, so they start spending before any money is received. However, there is no set pattern of terms an entrepreneur might be able to anticipate from either. Liquidation preference.

Should Investors in the Same Round of Financing Ever Get Different Prices?

Both Sides of the Table

If you do a capped note it’s bad for the entrepreneur. It has both a “full rachet” and “multiple liquidation preferences.” Here is what I recommend very often – privately – to startup entrepreneurs for angel funding.

Keep Term Sheets Simple for Quicker Cash to Spend

Gust

Entrepreneurs sometimes assume an initial agreement with an angel is a commitment, so they start spending before any money is received. However, there is no set pattern of terms an entrepreneur might be able to anticipate from either. Liquidation preference.

The Silliness Of Recapping Seed Rounds

Feld Thoughts

It usually happens in a later round, when the company is in fact worth much less than the liquidation preference overhang and insiders use a pay-to-play and a low valuation to reset the preferences and the cap table. In some cases this turned into nothing, but in a few cases it had magnificent outcomes for me and my gang, along with the entrepreneurs. Here’s the scenario. A company raises $1m of seed money from angels in a convertible note with a $6m cap.

The Corrosive Downside of Acquihires

Both Sides of the Table

And a few teams of super talented, educated and bright entrepreneurs make a few mill. 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

A Primer on Angel Investment ‘Simple Term Sheets’

Startup Professionals Musings

Entrepreneurs sometimes assume an initial agreement with an angel is a commitment, so they start spending before any money is received. However, there is no set pattern of terms an entrepreneur might be able to anticipate from an angel, either. Liquidation preference.

9 Common Mistakes to Avoid During Funding Rounds

Up and Running

When raising your first round of capital, there are a few common mistakes many entrepreneurs make. Founders should pay attention to the liquidation preference in the term sheet to ensure it does not become detrimental to them in a less than favorable exit.

Top five typical frustrations and confusions in the fundraising process

The Equity Kicker

If you’ve been paying attention you will know that Nicholas Lovell and I are writing a book for entrepreneurs who want to raise venture capital. We are now preparing to shoot a promotional video which opens with five frustrations that entrepreneurs frequently encounter when they embark on the fundraising process, expressed as questions. What on earth does this termsheet mean with it’s liquidation preferences, anti-dilution and protective provisions?

What Founders Need to Know: You Were Funded for a Liquidity Event – Start Looking

Steve Blank

Liquidity. While you might be interested in building a company that changes the world, regardless of how long it takes, your investors are interested in funding a company that changes the world so they can have a liquidity event within the life of their fund ~7-10 years. (A

Cliff Notes S-1: Kayak ? AGILEVC

Agile VC

Series A Preferred. liquidation preference, 6% accumulated dividend (1). Series A-1 Preferred. liquidation preference, 6% accumulated dividend. Series B Preferred. liquidation preference, 6% accumulated dividend (1). Series B-1 Preferred.

Investors Beware: Today’s $100M+ Late-stage Private Rounds Are Very Different from an IPO

abovethecrowd.com

Buying into such a notion is dangerous – dangerous for the entrepreneur and dangerous for the investor. As a simple example, many investors and entrepreneurs do not realize that coupon or discount use is a contra-revenue event when it comes to revenue recognition.

IPO 103

Is it Time for You to Earn or to Learn?

Both Sides of the Table

I often have career discussions with entrepreneurs – both young and more mature – whether they should join company “X&# or not. BTW, this ignores liquidation preferences which actually mean you’ll earn less. This is part of my Startup Advice series.

Killer articles on startups

A Smart Bear: Startups and Marketing for Geeks

6 Simple Selling Tips For Software Entrepreneurs [link] (from OnStartups). 6 Simple Selling Tips For Software Entrepreneurs. US Economic Risks (Sept 2010): Impact on Investors & Entrepreneurs [link]. US Economic Risks (Sept 2010): Impact on Investors & Entrepreneurs | Both Sides of the Table. Great basic guide on VC / Startup liquidation preferences: [link]. Beware the trappings of liquidation preference | VentureBeat.

Some Career Advice for Aspiring Tech CEOs

Both Sides of the Table

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.” Equally, it could be that as a mid-level employee you prefer to see the company try to get to a $1 billion exit where you could make substantial money but the CEO sells early because she is sitting on 10x the equity as you and can earn well on a $50 million exit.

Early stage money: The problem with PPMs

Berkonomics

In most cases, those entrepreneurs choosing to raise capital using PPMs retain specialists (many of whom are lawyers) to write their PPMs – a rather expensive undertaking. Regarding PPMs, my recommendations to entrepreneurs are: Don’t prepare PPMs to fund startup rounds of investment.

Twitter Link Roundup #215 – Small Business, Startups, Innovation, Social Media, Design, Marketing and More

crowdSPRING Blog

9 Ways Entrepreneurs Can Learn From Their Customers – crowdspring.co/1loBthB. Good read for entrepreneurs & startup employees on liquidation preferences – crowdspring.co/1neVvzy. 9 Ways Entrepreneurs Can Learn From Their Customers – crowdspring.co/1loBthB.

In 15 Years From Now Half of US Universities May Be in Bankruptcy. My Surprise Discussion with @ClayChristensen

Both Sides of the Table

We talked about how business school historically hasn’t positioned entrepreneurs well for success. I wrote about that before in a post about “ whether MBAs are necessary for entrepreneurs. His class reading lists could be a primer for any entrepreneur, not just MBAs.