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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. However, most of the later rounds or companies raise feature simple 1x liquidation preferences and we’re fine with that.

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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., The amount of the liquidation preference is usually expressed as a multiple, with the most common liquidation preference being “1X non-participating.”

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Liquidation Preference - An Example

Recent Buzzes - VC Experts, Inc.

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.

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

Feld Thoughts

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.

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Understanding Liquidation Preferences

VC Deal Lawyer

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. .

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Everyone Needs A Diversion

Feld Thoughts

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.

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Exit Math

StartupCFO

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.

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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.

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Founder Liquidity

K9 Ventures

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.

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Founder Liquidity

K9 Ventures

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.

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Top Ten Posts in 2011

Scott Edward Walker

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.

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Here's Why You Need A Liquidation Preference

A VC : Venture Capital and Technology

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.

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Examples of Liquidation Preferences

Constantly Learning

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.

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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.

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Liquidation Preference - An Example

Recent Buzzes - VC Experts, Inc.

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

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Liquidation Preferences

charliecrystle.com

[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.

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Venture Capital Term Sheets: Conversion Rights

Scott Edward Walker

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.

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One Simple Paragraph Every Entrepreneur Should Add to Their Convertible Notes

Both Sides of the Table

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.

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

Feld Thoughts

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.

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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.

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@altgate » Blog Archive » The 3X Liquidation Preference Is Back!

Altgate

@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.

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Unicorpse

Feld Thoughts

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.

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No Mess (Too Much Liquidation Preference)

ithacaVC

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.

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Convertible Note Seed Financings: Econ 101 for Founders

Scott Edward Walker

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

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Deal Terms: Liquidation Preferences, Founder Options

charliecrystle.com

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 [.].

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

Both Sides of the Table

To better understand the arguments for / against convertible equity I suggest you read my posts on those topics: Is convertible debt preferable to equity? ” And some seed stage investors told me, “I prefer not to fight over price now. million of liquidation preferences.

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

Feld Thoughts

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.

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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. There's an interesting TechCrunch post a while back on the amount of money different people made on the Google acquisition of Slide.

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Unicorn deals – not that heavily structured

The Equity Kicker

All of the deals had a liquidation preference of 1x or more. However, few of the deals went beyond a simple 1x non-participating preference share. I always wondered if companies were accepting multiple liquidation preferences in exchange for high valuations, but that was only the case in 3% of the deals analysed. Last May law firm Fenwick and West published an analysis of the 37 US unicorn deals that happened in the twelve months ending 31st March 2015.

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Model Cap Tables With VCHub

Ask The VC

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. 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.

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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.

144

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. I know how to structure around that to protect the founders from getting screwed on a multiple liquidation preference. This week.

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Common Stock vs. Preferred Stock in Venture Funding Transactions

Growthink Blog

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.

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Equity for Early Employees in Early Stage Startups

SoCal CTO

There's also the aspect that the equity that you typically get as part of equity compensation is behind other equity in preference and thus effectively has lower value.

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Nobody Is Crying For You When You Are Worth Billions

A VC : Venture Capital and Technology

They are most likely (I don't know the terms of the Spotify deal so I am guessing) buying a Preferred Stock that gives them a liquidation preference (their money back or possibly plus some guaranteed return) in the event the company is sold at or below the valuation of their investment. I did a talk with Bill Werde at Billboard's FutureSound conference a few weeks ago. The entire talk is online (in two parts) here.

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What’s In A Term Sheet?

Early Growth Financial Services

I discussed Change of Control, Reverse Vesting, and Liquidation Preferences in … Continue reading → Equity / Debt / Venture Funding You came, you pitched, you conquered. Congratulations! But do you know what to do once you’re asked to sign a term sheet? Let me say that first, you should have already retained a good startup lawyer. Most investors will expect this.

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

The Next Web

The terms Liquidation preference: a very important clause… This story continues at The Next Web. Andrej Kiska is an Associate at Credo Ventures. If you haven’t read the first part on equity term sheets, I strongly recommend doing so before moving on.

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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. They raised $2 million but when you add up all of the liquidation preferences if they convert at our proposed share price the total liquidation preferences would equal more than $7 million.

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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. Here’s the scenario. A company raises $1m of seed money from angels in a convertible note with a $6m cap.

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Convertible Debt – Early Versus Late Stage Dynamics

Ask The VC

In these cases, one saw terms like liquidations preferences and in some cases changes to board and / or voting control come into play. Given the traditional complexity and cost of legal fees associated with preferred stock financings, however, convertible debt became a common way to make seed stage investments as it tended to be simpler and less expensive from a legal perspective. Once again we continue our series on convertible debt deals.

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