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.

Anatomy of a Term Sheet: Liquidation Preference

VC Ready Blog

We continue our discussion of the Charter provisions with the liquidation preference, which is the most important economic term in the term sheet after the valuation because it establishes the relative rights of the investors and the common stockholders with respect to assets available for distribution when the company winds up its business. The model term sheet includes three alternative provisions for the liquidation preference.

Anatomy of a Term Sheet: Liquidation Preference

VC Ready Blog

We continue our discussion of the Charter provisions with the liquidation preference, which is the most important economic term in the term sheet after the valuation because it establishes the relative rights of the investors and the common stockholders with respect to assets available for distribution when the company winds up its business. The model term sheet includes three alternative provisions for the 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.

Short Note on Liquidation Preferences

ArcticStartup

He initially invested about $7 million into the company, profiting $25 million in preferred stock and about $14 million with his common stock. Nevertheless, this is a good story to remind all the entrepreneurs out there of the technicalities in selling your company

Convertible Debt – Other Terms

Ask The VC

If you are an entrepreneur, check out what the Applicable Federal Rates (AFRs) are to see the lowest legally allowable interest rates are and bump them up just a little bit (for volatility) and suggest whatever that number is. Liquidation Preferences : Every now and then you’ll see a liquidation preference in a convertible debt deal. Convertible Debt convertible debt interest rate liquidation preferences pro-rata rights

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).

What Are the Rights of Minority Stockholders?

Scott Edward Walker

There is, however, another set of rights with which many entrepreneurs may not be familiar: State law rights. 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.

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.

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 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.

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

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.

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.

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

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.”.

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 ….

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.

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.

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.

Venture Deals: Chapter 4: Economic Terms of the Term Sheet

Ask The VC

In this chapter we discuss all of the terms that make up the economics of the deal, including price, liquidation preference, pay-to-play, vesting, the employee pool, and antidilution. Almost all of the terms also have a special bonus “The Entrepreneurs Perspective&# from our good friend Matt Blumberg, the CEO of Return Path. We are now getting into the juicy stuff – economics of the deal.

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.

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.

Fear is the Mind Killer of the Silicon Valley Entrepreneur (we.

500 Hats

Master of 500 Hats A blog about Geeks, Entrepreneurs, & Startups in Silicon Valley, by Dave McClure. Fear is the Mind Killer of the Silicon Valley Entrepreneur Web 3.0 = Hailstorm 2.0 & How MSFT-YHOO could beat GOOG Business Models for Social Networks Facebooks #1 Problem Publishing 2.0,

in search of.the ideal term sheet

Seed Stage Capital

It is very basic (a good thing) and entrepreneur-friendly. What this means: VCs try to increase returns by asking for large liquidation preferences. So if you raise $10 million at a 3x liquidation preference and then sell for $25 million, founders and emplyees get nothing.

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.

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.

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.

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.

Model Cap Tables With VCHub

Ask The VC

Jeff has done a nice job building a site that both models a cap table and provides a lot of information to empower entrepreneurs both with educational resources and software tools. Convertible vs. Participating Preferred. Liquidation Preferences. A few days ago I answered a question on AsktheVC about modeling cap tables. After a quick email conversation with Jeff Boardman (founder of LearnVC ), I realize I had left his product off the list.

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.

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.

3 Venture Capital Deals You Should Never Make

Inc Startups

As more and more start-ups launch, more entrepreneurs are fighting for their share of the venture capital pile. Gary Schall, a lawyer at WilmerHale who advises tech entrepreneurs, writes in Xconomy about three sets of funding terms to avoid when you''re trying to raise cash.

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

Angel Education is Sometimes Required

Taffy Williams

Typical terms on a convertible note include such things as: interest, discount, conversion definition, ties to future round of financing, and possibly liquidation preferences. Liquidation preferences over the last several years have been as high as 3x the invested funds. A 1x liquidation preference would mean the Angel would receive their original money plus accruals returned to them on the sale of the company. entrepreneur investor Startup financing

Terms, Term Sheets, and Terminal Value

A VC : Venture Capital and Technology

The first is the amount being raised, the second is the dilution to the entrepreneur and the ownership the investors are buying (largely the same thing), and the third is the relationship between the investor and the entrepreneur. I do care about and want a plain vanilla one times liquidation preference because I think it is fair. Any multiple of liquidation or participation should be avoided at all costs by both sides.