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.

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.”

Trending Sources

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. .

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.

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 [.]. Most convertible notes have a price cap as a feature term.

Founder Liquidity

K9 Ventures

You raised a Series A round, a Series B round, and this year are just about to raise a big Series C round at a great valuation. 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. If they have, then there is no reason the founders shouldn’t get some liquidity of their own.

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.

More on Liquidation Preferences

Altgate

@altgate Startups, Venture Capital & Everything In Between Skip to content Home Furqan Nazeeri (fn@altgate.com) ← Pre-Money Valuation vs Number of Founders Where Do Tech VCs Invest? One of the least understood of these key terms is the liquidation preference.

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.

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.

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. The size of these companies’ private valuations may be similar to a traditional public company valuation, but that is where the similarities begin and end.

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. Me: There is no rational explanation for valuations of A round companies by ANY objective financial measure. People seem concerned about valuation. Why don’t they set a valuation then?

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. But, as you raise more money at higher valuations, this will normalize. Then use the down round to clean up your preference overhang.

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? This part 2 will address the economics of a convertible note seed financing and the three key economic terms: (i) the conversion discount, (ii) the conversion valuation cap and (iii) the interest rate.

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.

@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.

Pre-Money Valuation vs Number of Founders | @altgate

Altgate

I was working on some data analysis around the topic of angel round pre-money valuations (which I’ll post soon) and came up with the following interesting charts. What is interesting is that you see a peak pre-money valuation of $3.16

Unicorpse

Feld Thoughts

But a lot of these are paper unicorns, so their valuations may not be real for a while.” Last week Salesforce CEO Marc Benioff also predicted dead unicorns as startups seem to focus more on their valuations than their customers.”

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.

LP 0

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.

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. However, whilst I haven’t seen a full analysis, I doubt this additional downside protection would be enough to explain all the difference in valuation.

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. When an investor like Fidelity puts tens of millions of cash into Spotify at a $3bn valuation, they are not buying publicly traded common stock that will go up and down with the value of the company. The $3bn valuation is nonsense.

Equity for Early Employees in Early Stage Startups

SoCal CTO

If the company's valuation is $2 million, $90k is 4.5%. Of course, to be able to use this kind of formula, you will need to be able to determine how much impact the person will have and figure out a valuation.

Dilution concerns by founders and investors

Taffy Williams

Just recently, a company’s team exchanged numerous emails discussing valuation and downstream dilution. A few key areas to consider : Does the capital raise enhance development and increase valuation of the company? Does failure to raise capital harm the company valuation?

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. Having worked on several of these high-valuation deals over the years, it surprises me that no mention (in anything I read) is ever made of how heavily structured the deals are to protect the investors from downside risk.

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.

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. Investors typically arrive at reasonable valuation conclusions after a process of due diligence. But how can you get an idea of what valuation is “in the ballpark”?

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. Me: There is no rational explanation for valuations of A round companies by ANY objective financial measure. People seem concerned about valuation.

Short Note on Liquidation Preferences

ArcticStartup

The reason the post is interesting is the fact that it shows how different investors get their returns in a case where the valuation is only 36% of what it was 2 years ago. Does it make sense to ramp up your valuation no matter what?

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.

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

The Next Web

For a general introduction to term sheets and the trade-off between high valuation and complex investment structure, please refer to the introductory post to the guide. The terms Liquidation preference: a very important clause… This story continues at The Next Web.

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. The new money comes in at a pre-money valuation of $100, but includes a complete refresh of founder equity to 40% of the company. Here’s the scenario.

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. Seriously, pre-money valuation is a function of many things (team strength, size of market, IP, hotness of sector, etc.) That is saying exactly what the expected pre-money valuation is.

7 Investor Term Sheet Demands Startups Need Not Fear

Startup Professionals Musings

Perhaps they're way off in their valuation (usually far too high), or paralyzed by fear at seeing the other terms, because they have no idea what's normal, and what's worth a fight to the death (their startup's). Investor liquidation priority.

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.

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, setting expectations too high for ensuing rounds. It might be difficult to exceed your valuation, making investor relations difficult. – Phil Chen, Systems Watch.

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.

Should Investors in the Same Round of Financing Ever Get Different Prices?

Both Sides of the Table

It has both a “full rachet” and “multiple liquidation preferences.” We plan to raise at a $5 million pre-money valuation. They share in liquidation preferences pari passu and they vote as a single class.

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

Both Sides of the Table

I have been talking about my concerns about valuations for the past couple of years because, well, they’ve been rising very rapidly the past two years! ” “Mark has a vested interest in talking down valuations of startups.” Do Investors WANT Valuations to Drop?

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.