→ 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. MORE

The questions include: Have you raised capital with liquidation preferences, and what are they? Scott Belsky has a great post up titled Don’t Get Trampled: The Puzzle For “Unicorn” Employees. In it, he’s got a bunch of questions, along with detailed discussion, that you should ask your potential employer if you are considering a job at a unicorn (company with > $1b private valuation.) His suggestion is to strongly “audit your comp” in advance. MORE

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. MORE

For example, he will explain to you how the liquidation preference works and run spreadsheets, if necessary, to show you how much money you will receive based on different sale scenarios; he will explain to you how the option pool works, including the founders’ significant dilution; and he will discuss what protective provisions are and other tricky legal terms, such as drag-along rights and anti-dilution provisions. MORE

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. Startup Issues anti-dilution provisions controlling stockholders conversion rights derivative claim fiduciary duty inspection rights liquidation preferences minority stockholders oppression proper purpose redemption rights MORE

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. We are now getting into the juicy stuff – economics of the deal. When discussing the economics of a VC deal, one often hears the question “What is the valuation?” MORE

VC Issues due diligence exploding term sheets founders Fred Wilson investors' option liquidation preferences no shop Rand Fish redemption rights startup vc VC term sheet venture capital MORE

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. MORE

Liquidation Preferences : Every now and then you’ll see a liquidation preference in a convertible debt deal. It works the same as it does in a preferred stock deal – the investors get their money back first, or a multiple of their money back first, before any proceeds are distributed to anyone else. Convertible Debt convertible debt interest rate liquidation preferences pro-rata rights MORE

And that too usually when there is sufficient investor demand for the next round, i.e. the leverage needs to be in the company’s hand (rather than investors) for any type of founder liquidity to even be an option. There are several arguments against providing founder liquidity: 1) The money doesn’t go to the company, but into founders’ pockets : Yes, the money from founder liquidity does go to founders’ pockets, but that’s entirely the point. MORE

Depending on the delta between the price cap and the pre-money valuation of the qualified equity financing, the convertible note investors could receive a windfall in terms of liquidation preference. Most convertible notes have a price cap as a feature term. The Potential Problem Let’s say Series A investors invest at a pre-money valuation that [.]. Convertible Notes MORE

They can take their “preference” or right to take their cost (or cost + some extra) back first, before common shareholders get anything. Scenario 2 : Liquidation Preference. As you can imagine, they would only exercise this preference for modest exits. Even though the VCs own 30% of the company, they get 50% of the proceeds as a result of the preference. Scenario 3 : Participating Liquidation Preference. MORE

I’ve seen every imaginable type of liquidation preference structure, pay-to-play dynamic, preferred return, ratchet, share/option bonus, option repricing, and carveout. I suffered through the next financing after implementing a complex structure, or a sale of the company, or a liquidation. Then use the down round to clean up your preference overhang. When I see a carveout being proposed these days, I know there’s a liquidation preference problem. MORE

This typically results when the company has raised a lot of money and the preferred stock liquidation preference would absorb an out sized portion of the exit proceeds. The second ( Liquidity_Bonus_Plan_-_Board_Meeting_Slides ) is a power point presentation that a startup board might review when adopting a plan. I have posted a few times on management carve out plans (back in February 2011 and November 2011 ; wow, time flies!!). MORE

A liquidation preference is exactly what it sounds like, priority treatment for certain stockholders upon the liquidation, sale, merger, IPO or dissolution of a company. It is a typical Series Preferred Stock right in venture financing transactions. The current financing market, as well as the structure of your prior Series Preferred rounds, will drive the type of liquidation preference you can negotiate for yourself. Series B Preferred. . MORE

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. The liquidation preference means what is sounds - namely that preferred stock holders with this right get all of their money back (i.e. MORE

We’ve updated our Foundry Group web site with the new Liquidation Preference beer photo. Foundry Group beer diversion i'm a vc liquidation preference websiteEveryone needs a diversion. MORE

ii) why are convertible notes issued instead of shares of common or preferred stock? If the noteholders invested $500,000 and the price per share of the Series A Preferred Stock were $1.00, the noteholders would convert the loan at an effective price of $0.50 MORE

Liquidation Preference is an important term when negotiating terms of an investment. The term can be made up of essentially two parts that dictates when and how much an investor may receive upon a liquidation, trade sell, or other non-IPO exit. revealed that the latest Series C holders were willing to compromise some on the Liquidation Preference in order to obtain a stake in the company. Liquidation Preferences can best be explained through an example. MORE

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. MORE

When you do a convertible note with a cap that converts into the next round of funding one of the unintended consequences is that if you’re successful and raise at a larger price than your cap the early angels often get “multiple liquidation preferences” on their dollars in. When that initial note converts in stead of $500,000 liquidation preference they would get $2.5 They get their full investment as a 1x liquidation preference. MORE

Liquidation Preference is an important term when negotiating terms of an investment. The term can be made up of essentially two parts that dictates when and how much an investor may receive upon a liquidation, trade sell, or other non-IPO exit. revealed that the latest Series C holders were willing to compromise some on the Liquidation Preference in order to obtain a stake in the company. Liquidation Preferences can best be explained through an example MORE

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.”. As an angel investor, I have never asked for a liquidation preference on conversion that is greater than the dollars I’ve invested. MORE

He initially invested about $7 million into the company, profiting $25 million in preferred stock and about $14 million with his common stock. There's an interesting TechCrunch post a while back on the amount of money different people made on the Google acquisition of Slide. MORE

I get a lot of heat every time I mention that I won't invest without a liquidation preference. The reason Fidelity, Founders Fund, and Mayfield got their money back is they had a liquidation preference. People say that it means I don't want to take a risk. I am happy to take a risk. We do it every time we make an investment. We lose money on some of them and I can live with losing money. It is the price you have to pay for the opportunity to make money. MORE

[link] I posted on my personal blog about why startups should be very concerned about liquidation preferences. Take a look and come back to comment. Filed under: Startups. MORE

As an investor, would I rather own 30% of a company that is acquired for $300m in cash that had only raised $10m or 2% of a company with a paper value of $1b and $200m of liquidation preferences? The current usage of the word unicorn makes me tired. MORE

Down: Liquidation preference. 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. MORE

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. MORE

@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. MORE

Here are the issues I have addressed to date: common mistakes dealing with VC’s valuation liquidation preferences stock options exploding term sheets and no-shop provisions anti-dilution provisions dividends Board control protective provisions drag-along provisions pay-to-play and pull-up provisions In today’s post, I examine conversion rights of investors. As many of you know, VC investors are typically issued shares of preferred stock, not common stock. MORE

Liquidation preferences are a common thing to see in a term sheet. Although many sites break down what liquidation preferences mean, I hardly see examples of each preference. I decided to break down the common liquidation preferences with examples for easy reference. Liquidation Preferences. A liquidation preference is the ability for the investors to take there money out before the money left over is divided among the shareholders. MORE

Continuing with the “No Mess” theme of commenting on things that give VCs pause, I thought it would be good to touch on liquidation preference. Specifically, “too much” liquidation preference (I will use “LP” for liquidation preference). As most of you probably know, LP is one of the fundamental economic attributes of preferred stock that preferred shareholders enjoy. MORE

If you want to discuss liquidation preferences, vesting schedules, or anything startup-related, I’ll be holding an office hour session this Friday March 7th from 130-230pm at UP Global’s SXSW Startup Oasis. The office hour portion of Startup Oasis is blocks of time where you can meet with mentors across a diverse range of skill sets. […]. Startup Lawyer MORE

What Is A Liquidation Preference? 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). Moreover, I’m publishing an eBook with Hyperink entitled The Startup Law Playbook , which should be available shortly. MORE

Rather than comment on it directly, I am re-publishing sections from a post on TechCrunch: " The key terms include the elimination of participation with preferred stock, a 1x liquidation preference, and single trigger vesting acceleration on acquisition. MORE

Indeed, there comes a point in time in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first; for example, in a venture capital financing, perhaps the issue is the liquidation preference or the size of the option pool ; or, in an acquisition, perhaps the issue is the cap on seller’s liability or the amount of the escrow. MORE

Liquidation preferences have always seemed to be a case of having your cake and eating it too for investors. I’m guessing the original intent was strictly for downside protection. But it’s become a way for investors to guarantee a certain upside–risk mitigation at the expense of common. Put another way, it’s terms like these that value [.]. MORE

The punishment comes in the form of “unjust” liquidation preference that the note holders end up with when they convert at a valuation cap that is way lower than the valuation of the actual round. The “unjust” liquidation preference comes in when the valuation cap price applies (it also applies a bit with a discount that is large). Each share of Series A will have a liquidation preference of $1.00 (assuming 1X preference, which is normal). MORE

Here are the issues I have addressed to date: common mistakes dealing with VC’s valuation liquidation preferences stock options exploding term sheets and no-shop provisions anti-dilution provisions dividends Board control protective provisions drag-along provisions pay-to-play and pull-up provisions conversion rights In today’s post, I examine the redemption rights of investors. MORE

And that too usually when there is sufficient investor demand for the next round, i.e. the leverage needs to be in the company’s hand (rather than investors) for any type of founder liquidity to even be an option. There are several arguments against providing founder liquidity: 1) The money doesn’t go to the company, but into founders’ pockets : Yes, the money from founder liquidity does go to founders’ pockets, but that’s entirely the point. MORE

It turns out that ‘time bomb’ is the much maligned and, I suspect, little understood, liquidation preference. To be clear, liquidation preferences are sometimes used badly and founders should generally turn away from investors who ask for multiple liquidation preferences. However, most of the later rounds or companies raise feature simple 1x liquidation preferences and we’re fine with that. MORE

In most equity financing rounds, an investor will ask for (and get) a term called a liquidation preference. A liquidation preference is the amount that must be paid to a preferred stock holder before any sale proceeds may be paid to the holders of common stock (i.e., The amount of the liquidation preference is usually expressed as a multiple, with the most common liquidation preference being “1X non-participating.” MORE