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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. Startup general interest

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., Preferred Stock

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. Non-Participating Preference – (a/k/a - straight 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.

Price Cap Liquidation Preference Windfall Regulators

The Startup Lawyer

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. The Potential Problem Let’s say Series A investors invest at a pre-money valuation that [.]. Convertible Notes

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? Introduction We are in the golden age of seed financing.

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.

More on Liquidation Preferences

Altgate

One of the least understood of these key terms is the liquidation preference. For example, rounds with a preference between 1.1X

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. It’s simply not true.

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. It’s the silent screwing that stings.

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

abovethecrowd.com

An unprecedented 80 private companies have raised financings at valuations over $1B in the last few years. Consider the case of Fab.com.

IPO 62

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. People seem concerned about valuation. This week. I see.

Unicorpse

Feld Thoughts

But a lot of these are paper unicorns, so their valuations may not be real for a while.” The current usage of the word unicorn makes me tired.

Venture Capital Term Sheets: Conversion Rights

Scott Edward Walker

As many of you know, VC investors are typically issued shares of preferred stock, not common stock. Indeed, preferred stock, as the name suggests, is preferable to (and more valuable than) common stock because it grants certain key rights to the holders, one of which is a conversion right. What Are Optional Conversion Rights?

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.

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

Altgate

Let’s recap how expensive a 3x liquidation preference really is. Well, I guess it’s a sign of the time. Yippee.

Pre-Money Valuation vs Number of Founders | @altgate

Altgate

What is interesting is that you see a peak pre-money valuation of $3.16 Again, anecdotal though. So, I’m curious. What is your take?

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). Ok, enough of the background.

LP 0

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? What is a Conversion Valuation Cap? million in 2011.

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.

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.”.

Unicorn deals – not that heavily structured

The Equity Kicker

Here’s the headline data on the deals: Mean valuation: $4.4bn. Median valuation: $1.6bn. 35% of companies had valuations in the $1.0-1.1bn range, indicating many companies negotiated specifically to get unicorn status. All of the deals had a liquidation preference of 1x or more. Venture Capital

Nobody Is Crying For You When You Are Worth Billions

A VC : Venture Capital and Technology

We have a few companies that have kept their fundraising valuations private, at great difficulty and effort. Spotify's $3bn valuation and Airbnb's $2bn valuation aren't real valuations. The $3bn valuation is nonsense. And the media pounces on these big financing valuations like a hyena on red meat.

Unicorns: High Valuation Deals and Structure

Allen's Blog

There are now well over a hundred private tech companies that have announced financings with post-money valuations of over $1B. There are often numerous other protective terms as well: strong liquidation preference protections, antidilution protection, drag along rights, etc.

Equity for Early Employees in Early Stage Startups

SoCal CTO

If the company's valuation is $2 million, $90k is 4.5%. I'll get to service providers in a later post. Which means n = (i - 1)/i. million.

Dilution concerns by founders and investors

Taffy Williams

Just recently, a company’s team exchanged numerous emails discussing valuation and downstream dilution. In for a penny?”

The Silliness Of Recapping Seed Rounds

Feld Thoughts

Assuming equity is raised at or above that cap, the total dilution, before the new money, is 16.6% (equivalent to an equity financing of $1m at a $6m post money valuation. The term sheet converts all the convertible debt into a post-money valuation of $100, essentially making the convertible debt worthless. Here’s the scenario.

The Truth About Early Stage Pre-Money Valuations

Ask the Angels

I think there are three fundamental truths regarding the valuation of early stage businesses by potential investors: The first is that a pre-money valuation is ultimately an outcome of negotiation , rather than a mathematical calculation of discounted cash flow or any other metric of potential company performance. By Al Schneider.

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 see.

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.

Valuation: Buying the Fire in the Belly

charliecrystle.com

million, 1x non-participating liquidation preference. I've been talking with a great entrepreneur recently, connecting her with some awesome folks and weighing in on funding. A kind of crappy seed-stage term sheet is on the table from a group that should be more, well, they ought to know better. I think you should set the the terms.

Common Stock vs. Preferred Stock in Venture Funding Transactions

Growthink Blog

The question is whether they need to issue common or preferred stock. If, then the company were to be sold for $5,000,000 (i.e. read more.

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. Entrepreneur Analysis and Opinio

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. In the end, the main force driving the use of convertible debt in early stage companies is the parties’ desire to avoid setting a valuation. Today’s subject is early versus late stage dynamics.

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

Ask The VC

When discussing the economics of a VC deal, one often hears the question “What is the valuation?” While the valuation of a company, determined by multiplying the number of shares outstanding by the price per share, is one component of the deal, it’s a mistake to focus only on the valuation when considering the economics of a deal.

7 Investor Term Sheet Demands Startups Need Not Fear

Startup Professionals Musings

In very early startups, which have no valuation, the term sheet may specify a convertible note. Investor liquidation priority.

When to Bring Up Valuation

ithacaVC

If you want to scare off VCs, start your pitch with “we are looking to raise $X at a pre-money valuation of $Y” Stating how much you want to raise is fine and recommended. However, stating a desired pre-money valuation early in the process is not a good idea. Here is why.

9 Common Mistakes to Avoid During Funding Rounds

Up and Running

Setting too high a valuation. “Setting too high a valuation during a funding round can set you up for failure.”

Convertible Debt Revisited

ithacaVC

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. Appling the valuation cap of $3mm, the conversion price would be $3mm/10mm shares outstanding fully diluted = $.30.

What Most People Don’t Understand About How Startup Companies are Valued

Both Sides of the Table

” “Mark has a vested interest in talking down valuations of startups.” Do Investors WANT Valuations to Drop? Puh-lease.