The Startup Lawyer

JANUARY 10, 2012

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.” Preferred Stock

Liquidation Preference 62

Liquidation Preference Participating Preferred Preferred Stock Pre-Money Valuation 62

The Equity Kicker

MARCH 3, 2016

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.

Valuation 74

Valuation Liquidation Preference Participating Preferred IPO 74

Early Growth Financial Services

FEBRUARY 3, 2015

Today, we’re tackling participating versus non-participating preferred stock, a fundamental economic term in VC deals that goes to the heart of the business agreement between investors and management in connection with a sale of the company. Participating versus non-participating: what’s the difference? This post by Ian Engstrand first appeared on Founders Workbench.

Preferred Stock 47

Preferred Stock Stock Participating Preferred Common Stock 47

Both Sides of the Table

JULY 22, 2010

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.

Valuation 420

Valuation Founder Term Sheet Liquidation Preference 420

ithacaVC

APRIL 25, 2014

The model includes a simple waterfall analysis using both participating and non-participating preferred (see line 44 and then columns M and O). The larger the preferred stock liquidation preference the larger the impact of participating preferred. Columns I and J are important as they show the % of preferred stock ownership compared only to preferred stock outstanding.

Cap Table 66

Cap Table Preferred Stock Pre-Money Valuation Liquidation Preference 66

Both Sides of the Table

JULY 25, 2011

To this day I’m still surprised how few CEOs really understand the differences between 2x liquidation preference and a liquidation preference with a 2x cap. Or what “participating preferred&# stock is and how it can screw you. Liquidation preferences never say things like “participating preferred&# although we all talk about it. Blocking rights and liquidation preferences exist for rational reasons and when used properly are fair.

Liquidation Preference 255

Liquidation Preference Term Sheet Cap Table Redemption 255

The Equity Kicker

NOVEMBER 9, 2016

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.

Liquidation Preference 101

Liquidation Preference Silicon Valley Valuation Dilution 101

The Startup Lawyer

JULY 13, 2011

The deal documents called the preferred stock “Series Seed&# shares but after opening up the documents I quickly realized the deal terms were NOT the same as those in the well-known Series Seed document set. For example, the well-known Series Seed has a 1x non-participating liquidation preference , while the version I reviewed had a 1x participating preference. Preferred Stock

Liquidation Preference 58

Liquidation Preference Preferred Stock Participating Preferred Finance 58

ithacaVC

DECEMBER 14, 2011

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. Nothing better than sitting at LGA writing blog posts.

Liquidation Preference 46

Liquidation Preference LP Preferred Stock Liquidity Event 46

Scott Edward Walker

JUNE 9, 2019

First let’s discuss pro rata rights (sometimes referred to as “participation” or “preemptive” or “right of first offer/refusal” rights) – which investors will typically request in connection with any venture capital financing. For example, if an investor owns 20% of the equity of a startup on a fully-diluted basis following the closing of a Series A round, it will have the right to purchase 20% of the shares of the preferred stock issued in the subsequent Series B round.

Term Sheet 50

Term Sheet Preferred Stock Stock Dilution 50

Berkonomics

OCTOBER 1, 2015

Most sophisticated investors will take either a promissory note or preferred stock, both of which come before founder or management stock in a sale or liquidation. Further, preferred stock holders can be recipient of accrued dividends in a sale or liquidation. And some preferred investors have participation rights, where they take all of the above amounts, and then also convert their shares into common stock and participate again alongside the founders and option holders.

Dividend 86

Dividend Liquidity Event IRR Preferred Stock 86

ConversionXL

APRIL 17, 2019

The crowd leads the way to buyer preferences. Most of our preferences are learned and formed by social norms and expectations. These learned preferences can just as easily involve characteristics that, from an objective standpoint, don’t make a product any better—and might even make them worse, especially when it comes to texture. Yes, our preferences evolve as society evolves. Research participants were shown two photos.

Customer 105

Customer Arlington Social Media Virginia 105

ithacaVC

NOVEMBER 18, 2011

get both the carve out amount and the equity value; I guess double dipping is only for VCs that have participating preferred stock ). In my earlier post on management carve out plans (see it here ), I gave a detailed description of what these plans are and why boards of VC-backed companies often use them.

Management 46

Management Equity Preferred Stock Participating Preferred 46

Both Sides of the Table

SEPTEMBER 2, 2009

I took money with a 3x participating preferred liquidation preference with 8% compounded interest annually. Coupled with my participating preferred from 1999 and 2000 I had more than $55 million of liquidation preferences. This is part of my ongoing series “ Start Up Advice &# but I’d really like to call this post, “VC Advice.&#.

Founder 274

Founder Liquidation Preference Warrant Salary 274

Scott Edward Walker

NOVEMBER 26, 2017

Instead, you typically need a “warm referral” (or introduction) from someone they respect and trust — preferably a successful founder whom they have backed. For example, one investor may propose Series Seed Preferred Stock and another investor may agree to a SAFE ; or, in a larger financing, one investor may be pushing hard for participating preferred and a 25% option pool and another investor may agree to the same valuation, but straight preferred and a smaller pool.

Term Sheet 55

Term Sheet San Francisco Investment Bankers Syndicate 55

The Equity Kicker

JANUARY 25, 2016

Most long term venture industry insiders prefer operating in a steady climate where companies don’t have to follow highly risky strategies just to stay competitive. I will look into redressing that balance, but my first thought is that because of current practices/trends towards non-participating preference shares and early founder/employee/angel investor liquidity this is the one front on which we’re not doing too badly.

Venture Capital 86

Venture Capital eCommerce Angel Investor Valuation 86

Lightspeed Venture Partners

OCTOBER 1, 2012

These are typically called “ participating preferred ” structures, and are quite uncommon in West Coast VC deals these days, although they were once more common a couple of decades ago, and are still seen in some East Coast deals. In most investments, the investor gets straight preferred stock. But if the company is sold for less than their post money valuation, they would prefer to get their money back.

Pre-Money Valuation 125

Pre-Money Valuation Valuation Participating Preferred Preferred Stock 125

Both Sides of the Table

APRIL 14, 2010

That means that the likely have a minimum of $15 million in liquidation preferences. It will usually be higher because the liquidation preference has a dividend so if the deal is long in the tooth assume that the liquidation preference might be $20-22 million.

Venture Capital 320

Venture Capital Liquidation Preference Common Stock Dividend 320

The Equity Kicker

JULY 4, 2012

The posts will assume very little, if any, prior knowledge and should be useful to everyone from newbies to the industry to those who have been around venture capital a fair bit and have a decent understanding, but are a bit hazy around the edges on some of the more detailed points e.g. ‘weighted average anti-dilution’ or ‘1x participating preference share’ I think the posts deliver pretty well on this objective, but our challenge now is to make them into a book.

Venture Capital 91

Venture Capital Due Diligence Dilution Participating Preferred 91

Professor VC

JUNE 6, 2016

I can just picture Mr. Rogers saying "Children, can you say participating preferred stock with an uncapped 3x liquidation preference and a full ratchet?" In addition to the syndicate participants who can potentially add value, AngelList has its own institutional funds that often participate. Opening Day Barron Park Elementary School (9/8/98) "Make new friends, but keep the old. One is silver, the other is gold. A circle is round, it has no end.

Ratchet 28

Ratchet Cap Table Liquidation Preference Silicon Valley 28

ConversionXL

MAY 31, 2016

Furthermore, the same study found that an incredible 100% of participants preferred sites with sticky navigation bars, despite often not knowing why. Let’s talk about the collective pain in everyone’s marketing ass. Pretty much everyone’s mobile conversions suck. This isn’t a secret. You know it. I know it. Your bottom line might even be reeling from it. All types of businesses are seeing significantly lower mobile conversion rates.

Mobile 76

Mobile Conversion Affiliate Participating Preferred 76

Lightspeed Venture Partners

OCTOBER 7, 2012

Week three’s breakdown covered topics like how hard momentum is to turn around, and how participating preferred stock works. I’ve been writing up reviews of this season’s Shark Tank pitches from a silicon valley VCs perspective. This time I’ll break down week four of this season. BACK 9 DIPS. The first company started as a BBQ catering business, and eventually focused in on their most popular product, a dip made of blended up chicken plus various sauces.

Valuation 93

Valuation Pre-Money Valuation Due Diligence Silicon Valley 93

Professor VC

JULY 25, 2013

In investment parlance, it strictly means that new classes of stock have equal rights with prior classes in terms of liquidation preference, voting rights, etc. Yes, there are a number of cases in the middle where having a senior or participating preference does make a difference in liquidation proceeds, but I argue that it does very little to overall returns in a diversified portfolio.

Syndicate 40

Syndicate Syndication Term Sheet Liquidation Preference 40

ConversionXL

MARCH 19, 2012

People don’t often know why they prefer something. Most of our preferences are learned and largely formed by social norms and expectations that producers have a strong hand in shaping. Now that has become what the consumer prefers. These learned preferences can just as easily involve characteristics that, from an objective standpoint, do not make a product any better and might even make them worse — particularly when it relates to texture.

Arlington 105

Arlington Clickthrough Miami Social Media 105

Startup Company Lawyer

MARCH 14, 2010

Founders Institute Plain Preferred Term Sheet (by WSGR – disclaimer, I represent the Founders Institute and was involved in drafting this document). To differentiate it from typical “Series A&# preferred stock, which comes with certain expectations with regard to rights. There is no real rule to what a particular series of preferred stock is called. Dividend preference. TheFunded released their “Plain Preferred&# term sheet in August 2009.

Finance 56

Finance Dilution Term Sheet Dividend 56

Scott Edward Walker

APRIL 9, 2012

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. Most sophisticated investors, however, will not accept shares of common stock for their investment and will push hard for shares of preferred stock, with special rights (as discussed below).

Liquidation Preference 71

Liquidation Preference Preferred Stock Finance Valuation 71

Altgate

DECEMBER 18, 2008

@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.

Liquidation Preference 39

Liquidation Preference Dividend Venture Capital Participating Preferred 39

The Startup Toolkit

NOVEMBER 4, 2011

Next, we check that we’re safe from any particularly onerous terms like participation preferred. You’re facing two term sheets and have boiled them down to the most relevant facts, listed below. Which do you choose? Deal 1. 1mm total. 500k now, plus commitment to help close $500k more from other angels. Roughly 33% dilution for full round ($2mm pre-money). Deal 2. 1.25mm total. 250k now, plus 2 tranches for another $1mm based on performance goals.

Dilution 27

Dilution Term Sheet B2C Participating Preferred 27

ConversionXL

APRIL 23, 2013

If you’d like more people to take action, make the preferred actions ‘default’ Of course, this can be abused – like RyanAir makes buying travel insurance a default option and Vistaprint used to enroll people in their “membership” by default. In a study students were asked to taste different jams and rank them in the order of preference. Research participants were showed two photos.

Web 105

Web Design Denmark Green 105

Startup Company Lawyer

FEBRUARY 21, 2010

Due to aggregate liquidation preferences that may exceed the acquisition price in an M&A deal, common stock may be rendered worthless. For example, if a company has raised $20M in venture financings by issuing non-participating preferred stock , the holders of common stock will not receive any proceeds from an M&A transaction unless the transaction value exceeds $20M. Participation. Junior Preferred Stock.

Vesting 30

Vesting Retention Liquidation Preference Common Stock 30

The Startup Toolkit

NOVEMBER 4, 2011

Next, we check that we’re safe from any particularly onerous terms like participation preferred. You’re facing two term sheets and have boiled them down to the most relevant facts, listed below. Which do you choose? Deal 1. 1mm total. 500k now, plus commitment to help close $500k more from other angels. Roughly 33% dilution for full round ($2mm pre-money). Deal 2. 1.25mm total. 250k now, plus 2 tranches for another $1mm based on performance goals.

Dilution 20

Dilution Term Sheet B2C Participating Preferred 20

thinkspace.com

SEPTEMBER 7, 2012

Is the preference structure for preferred shareholders at the startup you work at Standard Preferred or Participating Preferred? Call Us: +1-855-629-6200. About. Mission Statement. Locations. Our Team. Press. Community. Careers. Member Coordinator. Bookkeeper. Marketing Intern. Services. Office Space. Coworking. Virtual Office. Meeting Rooms. Virtual Receptionist. Registered Agent. Contact. Event Calendar.

Equity 55

Equity Dilution Employee Vesting 55

www.payne.org

SEPTEMBER 22, 2011

2 Stock Classes: Common and Preferred. Stock Classes: Common and Preferred. Most venture-funded startups have different classes of stock: common and various flavors of preferred. Preferred stock classes typically go to investors, and in some cases founders (usually where the founders have already invested some of their own money to build the company). By convention, preferred stock classes are lettered, increasing for each round of funding: Series A, Series B, etc.

Equity 50

Equity Employee Vesting Stock 50

ConversionXL

JULY 12, 2017

In addition, the same study found that 100% of participants preferred sites with sticky navigation bars, despite usually not knowing why (that’s all of the participants – crazy). In the pursuit of sustainable and consistent ecommerce growth , we look to many places: content, SEO, Facebook, Instagram, paid acquisition, new channels, growth hacking.

eCommerce 100

eCommerce Mobile Conversion Warrant 100

ConversionXL

JULY 12, 2017

In addition, the same study found that 100% of participants preferred sites with sticky navigation bars, despite usually not knowing why (that’s all of the participants – crazy). In the pursuit of sustainable and consistent ecommerce growth , we look to many places: content, SEO, Facebook, Instagram, paid acquisition, new channels, growth hacking.

eCommerce 95

eCommerce Mobile Conversion Warrant 95