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In defence of liquidation preferences

The Equity Kicker

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.

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More on Liquidation Preferences


→ 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. .&# He said it as a joke, but it is totally true that pre-money valuation is just one of a handful of key economic terms in a term sheet.


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

Both Sides of the Table

Because convertible debt deals often have both a ‘full ratchet’ and often have ‘multiple liquidation preferences’ “ Yup. Convertible Notes Also Can Have Multiple Liquidation Preferences. Convertible notes often have multiple liquidation preferences. That’s right.

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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. 4 * $4 million) and not $4 million.

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In Q4 2022, founders face tough choices

VC Cafe

Liquidation preferences – in addition to lower valuations, investors are looking for protective provisions. That means that in these down rounds, some investors are asking to 2-5x liquidation preferences.

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Avoid Offensive Liquidation Preferences

The Startup Lawyer

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., founders, option holders, etc.).

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Praying to the God of Valuation

Both Sides of the Table

If they are private we still have fig leaves that cover us because some rounds might raise debt vs. equity or might fund with terms like multiple liquidation preferences or full-ratchets or convertible notes with caps. The tide has gone out. But this is still all about valuations and none of it is any fun anymore.

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