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. This post by Ian Engstrand first appeared on Founders Workbench. From time to time on Founders Workbench we give a brief primer on common terms and issues in venture financings.

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Preferred Stock Stock Participating Preferred Common Stock 47

Growthink Blog

JANUARY 24, 2011

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. One very popular "preferred right" or "preference" that adds very significant value to outside investors and is common in venture capital investments is a liquidation preference. This is an extremely valuable preference that can best be shown by example.

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Preferred Stock Common Stock Stock Liquidation Preference 78

Startup Professionals Musings

SEPTEMBER 26, 2015

For later investments, the price is equity, with a percentage of the owner stock to be assigned to the investor. Type of stock assigned to the investor. Investors typically demand preferred stock, to give themselves certain voting and liquidation privileges over later shareholders. Even founder’s shares are common stock. Preferred shares are not possible with a limited liability corporation (LLC), so expect to convert to a C-corp to get an equity investment.

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Term Sheet Demand Preferred Stock Stock 253

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. Why Can’t a Startup Issue Shares of Common Stock to Investors? In fact, many incubators like Y Combinator and TechStars are issued shares of common stock for their initial investment (usually about $20,000).

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Liquidation Preference Preferred Stock Finance Valuation 71

VC Cafe

JUNE 11, 2011

Some of the posts that got my attention this week… 5 Ways To Raise Funds for Your Startup – Mashable brings a good reminder on the ways to raise funding: friends/family/fools, incubators, convertible debt, preferred stock and VC. 101 bitesize Auto convertible debt Draft funding isn Mashable preferred stock projector screen virtual valley weekend

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Preferred Stock Incubator Analytics Stock 69

K9 Ventures

NOVEMBER 21, 2011

If there is one piece of advice I would give to the founders of BST, it is to consider selling a part of their personal stock in the company at that stage. If things go well, and your company succeeds beyond your wildest dreams, it will end up being the most expensive house ever (because you could have held your stock and made a lot more on it). 3) Setting a precedent for the price of the Common Stock : This is the biggest issue with founder liquidity.

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Founder Liquidation Preference Preferred Stock Common Stock 73

K9 Ventures

NOVEMBER 21, 2011

If there is one piece of advice I would give to the founders of BST, it is to consider selling a part of their personal stock in the company at that stage. If things go well, and your company succeeds beyond your wildest dreams, it will end up being the most expensive house ever (because you could have held your stock and made a lot more on it). 3) Setting a precedent for the price of the Common Stock : This is the biggest issue with founder liquidity.

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Founder Liquidation Preference Preferred Stock Common Stock 71

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

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Liquidation Preference Participating Preferred Pre-Money Valuation Preferred Stock 62

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

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Liquidation Preference Participating Preferred Preferred Stock Finance 58

Scott Edward Walker

SEPTEMBER 21, 2011

Finally, unless the startup is raising at least approximately $750,000, it generally is not in the company’s interest to issue shares of preferred stock. Accordingly, entrepreneurs are usually better served by issuing convertible notes to angel investors, which would automatically convert into shares of preferred stock in the Series A round. What about issuing shares of common stock?

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Preferred Stock Accredited Investor SEC Common Stock 43

Scott Edward Walker

JULY 7, 2011

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 conversion rights In today’s post, I examine the redemption rights of investors.

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Term Sheet Redemption Venture Capital Dividend 46

The Startup Lawyer

MARCH 1, 2010

The board is set up to consist of 3 directors: 1 director elected by the common (founders); 1 directors elected by the preferred (investors); 1 “independent&# director (i.e., 2) Series Seed Stock Preferred Stock Purchase Agreement. Tags: Preferred Stock documents lawyer seed funding

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Redemption Term Sheet Preferred Stock Dividend 66

The Startup Lawyer

MARCH 1, 2010

The board is set up to consist of 3 directors: 1 director elected by the common (founders); 1 directors elected by the preferred (investors); 1 “independent&# director (i.e., 2) Series Seed Stock Preferred Stock Purchase Agreement. Tags: Preferred Stock documents lawyer seed funding

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Redemption Term Sheet Dividend Vesting 40

The Startup Lawyer

MARCH 11, 2010

A variety of model startup seed funding docs have been released in the past year or so: TechStars Series AA Preferred , YCombinator Series AA Preferred , and TheFunded Founder Institute’s Plain Preferred. For example, a founder stock purchase agreement is 12+ pages long because founders can, have, and will fail and/or bail on startups (hence the vesting schedule & startup repurchase option).

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Delaware Hockey Stick Preferred Stock Merger 46

The Startup Lawyer

MARCH 11, 2010

A variety of model startup seed funding docs have been released in the past year or so: TechStars Series AA Preferred , YCombinator Series AA Preferred , and TheFunded Founder Institute’s Plain Preferred. For example, a founder stock purchase agreement is 12+ pages long because founders can, have, and will fail and/or bail on startups (hence the vesting schedule & startup repurchase option).

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Delaware Hockey Stick Preferred Stock Merger 43

Startup Professionals Musings

JANUARY 15, 2021

When an entrepreneur first incorporates a business, they may find themselves the proud owner of 10 million shares of common stock, commonly called founder’s shares. Make sure the government waits for a stock sale to collect taxes. Spread stock issuance over an earning period.

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Founder Dilution Vesting Stock 258

Startup Professionals Musings

MARCH 14, 2020

Experienced entrepreneurs understand investor expectations of Board representation, preferred stock, and payments based on interim milestones.

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Due Diligence Startup Intellectual Property Dividend 311

Startup Professionals Musings

JANUARY 4, 2020

Most professional investors will expect preferred stock, a board seat, rights to later rounds and perhaps anti-dilution protection. One of the big questions that every entrepreneur struggles with is how much funding they should request from investors in the first round.

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Valuation Startup Preferred Stock Equity 319

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.

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Cap Table Preferred Stock Pre-Money Valuation Liquidation Preference 66

ReadWriteStart

APRIL 7, 2011

The majority of financings was structured as preferred stock (69%), as opposed to convertible note financings (31%), and the vast majority of those (83%) had their conversion price capped. The median amount raised in preferred stock financings was $1.1 Investors took a board seat in approxmiately 70% of preferred stock financings, but in less than 10% of convertible note financings.

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Preferred Stock Seattle Silicon Valley Finance 105

Startup Professionals Musings

JANUARY 29, 2018

I’ll never forget that great sense of excitement I felt when I incorporated my first business, and realized that I was now the proud owner of 10 million shares of common stock. Unfortunately, in my years since as a small business advisor, I have seen too many founders squander this asset through a lack of understanding of some basic legal and operational issues, or by handing out nominally “free” stock to the wrong people at the wrong time.

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Stock Vesting Preferred Stock Dilution 168

Scott Edward Walker

JUNE 9, 2019

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. I liken it to participating preferred — which founders also do not typically understand until it is too late. Introduction.

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Term Sheet Preferred Stock Stock Dilution 50

Startup Professionals Musings

FEBRUARY 8, 2019

File founder stock election so no taxes are due until exit. Even though the initial stock has no value or market, it is imperative that you document the division of ownership immediately between co-founders commensurate with their investment, contribution, and role. You may start as an LLC but find that a potentially high-value investor insists on having preferred stock, which is only available with a C-Corp.

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LLC Limited Liability Company Merger Preferred Stock 192

Business Plan Blog

APRIL 10, 2012

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.” In layman’s terms, investors will give money to a startup but instead of getting money back, they get preferred stock in return. ii) why are convertible notes issued instead of shares of common or preferred stock?

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Preferred Stock Finance Equity Stock 40

Gust

JUNE 7, 2014

In some other cases, all Preferred investors are treated pari passeux , so steps 5/6 and 7/8 below would be combined into one.). 5) Senior Preferred Stock and warrants. 6) Any preference multiple on (5). 7) Junior Preferred Stock and warrants. 8) Any preference multiple on (7). 9) Common Stock (including any Preferred that converted to Common, any exercised options, and all Founders stock) and Common stock warrants.

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Warrant Preferred Stock Stock Common Stock 106

Both Sides of the Table

APRIL 6, 2020

Therefore you can amend the governing documents to a “simple majority of the preferred shareholders” can block one of the known affiliate rules rather than a single firm.

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Programming Affiliate SBA Government 263

Berkonomics

MARCH 8, 2018

The option price should be set by appraisal under IRS rule 409a, and certainly should be low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter. Inside board members, CEO and any other paid employees are not paid for board service in either stock options or cash. Give one percent equity to each outside board member vesting over four years of service.

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Early Stage Vesting Stock Options Preferred Stock 84

Scott Edward Walker

JUNE 9, 2011

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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Term Sheet Conversion Rights Venture Capital Conversion 53

Startup Company Lawyer

JANUARY 9, 2011

Convertible debt with a price cap seems to be the preferred structure for early-stage financings. A logical alternative to convertible debt is a priced Series A preferred stock financing. Mark Suster does a good job analyzing whether convertible debt is preferable to equity , and concludes that convertible debt is better. Convertible debt with a price cap preserves the investor’s “equity&# ownership, but gives the investor extra liquidation preference.

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Preferred Stock Liquidation Preference Stock Common Stock 47

ithacaVC

JUNE 29, 2018

This typically results when the company has raised a lot of money and the preferred stock liquidation preference would absorb an out sized portion of the exit proceeds. I have posted a few times on management carve out plans (back in February 2011 and November 2011 ; wow, time flies!!). Our portfolio companies routinely adopt carve out plans when the founders/employees equity values are not likely to provide enough incentive to get a company to an exit.

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Management Liquidation Preference Preferred Stock Dilution 40

Steve Blank

OCTOBER 24, 2017

To turn your company’s stock into cash, you engaged a top-notch investment bank (Morgan Stanley, Goldman Sachs) and/or their Silicon Valley compatriots (Hambrecht & Quist, Montgomery Securities, Robertson Stephens). None of this was law, and nothing in writing required this; this was just how these firms did business to protect their large institutional customers who would buy the stock. Founders can now outvote the preferred stock holders (the investors).

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Founder Stock IPO Common Stock 205

Startup Professionals Musings

MAY 18, 2015

When an entrepreneur first incorporates his or her business, he or she may find him or herself the proud owner of 10 million shares of common stock, commonly called founder’s shares. Every entrepreneur needs to understand the following basics, to be addressed at company formation, as they engage a qualified attorney to draw up the paperwork: Allocate founder’s stock commensurate with commitment. Make sure the government waits for a stock sale to collect taxes.

Stock 248

Stock Common Stock Vesting Startup 248

Startup Professionals Musings

MARCH 7, 2015

Most professional investors will expect preferred stock, a board seat, rights to later rounds and perhaps anti-dilution protection. One of the big questions that every entrepreneur struggles with is how much funding they should request from investors in the first round. They know from forums such as Shark Tank on TV that asking for either too much or too little will derail credibility in the eyes of the investor, and leave the entrepreneur with no money and a struggling startup.

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Preferred Stock Equity Dilution Bootstrapping 252

Steve Blank

APRIL 10, 2019

For most startup employee’s startup stock options are now a bad deal. Why Startups Offer Stock Options. In tech startups stock options were here almost from the beginning, first offered to the founders in 1957 at Fairchild Semiconductor , the first chip startup in Silicon Valley. As Venture Capital emerged as an industry in the mid 1970’s, investors in venture-funded startups began to give stock options to all their employees. Like stock options, RSU’s vest.

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Stock Options Stock Vesting IPO 264

YoungUpstarts

JUNE 26, 2020

I used to think a valuation was kind of like a stock price of a public company. Setting aside the issues of valuation of common stock vs. preferred stock, what I really didn’t understand was that a valuation is a set of expectations.

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Finance Valuation Startup Silicon Valley 180

Startup Company Lawyer

AUGUST 31, 2012

Other folks, such as Mark Suster, have also written about whether convertible debt is preferable to equity. Fred Wilson has been openly critical of convertible debt , and prefers priced equity rounds. Manu Kumar has also indicated that he prefers priced equity rounds to convertible debt. ” As a result, Ted introduced the Series Seed preferred stock documents as an alternative to convertible debt for early stage investments.

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Convertible Security Equity Security Preferred Stock 58

Startup Professionals Musings

AUGUST 1, 2016

Experienced entrepreneurs understand investor expectations of Board representation, preferred stock, and payments based on interim milestones. After many years of working with angel investors seriously trying to find new ventures worthy of their hard-earned money, I find their frustration often exceeds that of entrepreneurs sincerely looking for financial help.

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Due Diligence Intellectual Property Dividend Preferred Stock 181

The Startup Lawyer

JUNE 22, 2010

For this article, let’s assume this equity is the Series A Preferred Stock purchased by a venture capital fund. compensate the angel for the early risk), the convertible promissory note will have an automatic conversion discount feature by which the angel investor will exchange the convertible debt for shares of the Series A Preferred Stock at a discount to the price per share paid by the venture capital fund at a Qualified Financing.

Pre-Money Valuation 68

Pre-Money Valuation Preferred Stock Valuation Stock 68

ithacaVC

APRIL 5, 2011

A cap table is a written record (in Excel, for example) of who owns stock in your company. It lists every owner out by amount owned, type of stock (common or preferred), and date purchased. One rule of simple cap tables is to issue “normal” stock to founders (common stock only) and investors (typically preferred stock, but sometimes common stock to early friends and family). I am a huge fan of simple cap tables.

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Common Stock Stock Cap Table Preferred Stock 43

Startup Professionals Musings

NOVEMBER 30, 2015

A C-corporation is more complex and expensive, and is recommended only if you expect to pitch to professional investors who demand preferred stock, or to more than 100 potential shareholders. Aspiring entrepreneurs often ask me what to do first when starting a business.

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Entrepreneur Intellectual Property Stealth Preferred Stock 184

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. Take a situation where the VC investors finally see the chance of a return after ten years, with participating preferred and fifty percent of the ownership after several rounds.

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Dividend Liquidity Event IRR Preferred Stock 86

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.

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Liquidation Preference LP Preferred Stock Liquidity Event 46

Both Sides of the Table

JULY 25, 2011

Founders don’t often think about “primary&# stock vs, “fully diluted&# stock in terms of voting rights. 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. This article originally ran on TechCrunch.

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Liquidation Preference Term Sheet Cap Table Entrepreneur 257