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 Finance Participating Preferred 52

Recent Buzzes - VC Experts, Inc.

OCTOBER 18, 2011

What is the difference between Conventional Convertible Preferred (non-Participating Preferred) and Participating Preferred Stock ? How do these effect the outcome for investors when a non-IPO exit is about to happen? See for yourself in these simple examples

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Participating Preferred Preferred Stock IPO Stock 40

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. This is an extremely valuable preference that can best be shown by example.

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Preferred Stock Common Stock Stock Liquidation Preference 60

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.

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Term Sheet Demand Preferred Stock Liquidation Preference 131

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.

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Liquidation Preference Preferred Stock Finance Common Stock 69

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 40

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 49

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 43

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 41

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 Liquidation Preference 40

VC Cafe

OCTOBER 23, 2010

Fred Wilson , Paul Graham and Seth Levine all agree that as an entrepreneur one would prefer uncapped convertible debt to equity, but investors typically won’t go for it. Preferred Stock Purchase Agreement Series Seed Form SPA. B ack in March, Andreessen Horowitz and Fenwick & West, LLP published a series of documents that would help structure early stage investments in startups.

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Early Stage Preferred Stock Term Sheet Venture Capital 40

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 Open Source 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 Open Source 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.

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Early Stage Warrant Preferred Stock Common Stock 142

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 Participating Preferred 49

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 48

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 Common Stock 81

Ask The VC

SEPTEMBER 29, 2011

Liquidation Preferences : Every now and then you’ll see a liquidation preference in a convertible debt deal. It works the same as it does in a preferred stock deal – the investors get their money back first, or a multiple of their money back first, before any proceeds are distributed to anyone else. Convertible Debt convertible debt interest rate liquidation preferences pro-rata rights

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Liquidation Preference Preferred Stock Liquidity Event Stock 116

VC Deal Lawyer

FEBRUARY 15, 2010

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. Liquidation Preference Per Share. . .

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Liquidation Preference Preferred Stock Participating Preferred Stock 43

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

Ask The VC

OCTOBER 4, 2011

There are numerous different ways to calculate this, such as: $20,000 worth of common stock at the last value ascribed to either the common or preferred stock; $20,000 worth of the last round of preferred stock at that’s rounds price of the stock; or. 20,000 worth of the next round of preferred stock at whatever price that happens to be.

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Warrant Merger Preferred Stock Stock 122

Ask The VC

OCTOBER 6, 2011

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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Liquidation Preference Bridge Financing Preferred Stock Seed Stage 116

Gust

OCTOBER 5, 2011

Mandatory Conversion : The Notes and any accrued interest will be converted into the Company’s next issued series of preferred stock resulting in new money of not less than $1,000,000 (an “ Eligible Financing ”) at a discount to the per-share price of such preferred shares of 25% (the “ Conversion Price ” ). per share for 2,000,000 shares of newly issued Series A Preferred Stock.

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Finance Preferred Stock Term Sheet Angel Investor 100

Early Growth Financial Services

OCTOBER 2, 2014

In short, convertible equity is a form of financing that gives investors the right to preferred stock once a triggering event occurs. Lately I‘ve been getting more and more questions about convertible equity: “What is it?” and “Should I use it?” So I figured now’s the right time to answer a few questions and fill in some blanks. So what’s that mean? First some background… Convertible debt Convertible debt is a common feature of startup seed rounds, used in more than ?

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Equity Preferred Stock Seed Stage Finance 46

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 163

Gust

SEPTEMBER 29, 2011

For a traditional VC financing round structured as a sale of preferred stock, the best resources I can recommend are the Term Sheet Series by Brad Feld and Jason Mendelson and Startup Company Lawyer by Yokum Taku. A term sheet for a convertible note deal may run two or three pages, versus 8-10 pages for a typical Series A Preferred Stock financing. (I’ve

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Finance Term Sheet Preferred Stock Bridge Financing 126

VC Ready Blog

JANUARY 25, 2010

Price-based antidilution protection of some sort is a characteristic of most preferred stock and operates by increasing the number of shares of common stock into which a share of preferred stock converts (i.e. Weighted average antidilution reduces the conversion price of outstanding preferred stock in a proportionate manner taking into account both the number of shares being issued and the price per share.

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Antidilution Ratchet Preferred Stock Conversion Ratio 35

VC Ready Blog

JANUARY 25, 2010

Price-based antidilution protection of some sort is a characteristic of most preferred stock and operates by increasing the number of shares of common stock into which a share of preferred stock converts (i.e. Weighted average antidilution reduces the conversion price of outstanding preferred stock in a proportionate manner taking into account both the number of shares being issued and the price per share.

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Antidilution Ratchet Preferred Stock Conversion Ratio 35

VC Ready Blog

JANUARY 25, 2010

Price-based antidilution protection of some sort is a characteristic of most preferred stock and operates by increasing the number of shares of common stock into which a share of preferred stock converts (i.e. Weighted average antidilution reduces the conversion price of outstanding preferred stock in a proportionate manner taking into account both the number of shares being issued and the price per share.

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Antidilution Ratchet Preferred Stock Conversion Ratio 35

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 40

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 60

Ask The VC

JULY 19, 2011

Today’s runner up is Fred Wilson’s MBA Monday post on Financing Options: Preferred Stock. Our new motto over here at Ask the VC is “we read all the VC blog posts so you don’t have to.&# We’ll give you the best one of the day with a quick summary and – if there are runner ups, include them also. Of course, we are never entirely sure what day it is so these might be from yesterday, today, or even tomorrow when we are really ahead of our game.

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Preferred Stock Stock Customer Development Finance 109

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.

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Pre-Money Valuation Preferred Stock Valuation Stock 45

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 40

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

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Preferred Stock Finance Venture Capital Silicon Valley 26

VC Ready Blog

SEPTEMBER 13, 2010

Fully-diluted capital expresses the entire capitalization of a company in terms of shares of the company’s common stock by taking the shares of common stock already issued and outstanding and adding shares of common stock that may be issued upon (a) conversion of any convertible securities (such as convertible preferred stock) or (b) exercise of any rights to acquire common stock underlying options, warrants or other derivative securities.

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Dilution Common Stock Stock Preferred Stock 35

Will Price

MAY 27, 2005

Subjects covered include: liquidation preferences, stock vesting, conversion ratios, redemption rights, and other material elements of most vc firms term sheets. Brad Feld and the Mobius team put together a very insightful set of posts on term sheets. For entrepreneurs looking to raise money for the first time, I highly suggest reading the posts.

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Term Sheet Redemption Liquidation Preference Conversion Ratio 40

ithacaVC

JANUARY 18, 2017

Typically will either be convertible debt or preferred stock (Series Seed or Series A). Once in a while I get the question “What do I need to know about investing in a startup?” ” The context is typically where Friend A has asked Friend B to invest in Friend A’s startup business. Then Friend B asks me the question. This happens multiple times a year. It is a fair question. And one that is hard to answer definitively.

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Preferred Stock LLC Security Stock 50

VC Ready Blog

JULY 6, 2010

In this post we look at when an investor’s preferred stock may or must convert to common stock, and how the conversion ratio may be adjusted in certain circumstances. Preferred stock typically converts to common stock either: (a) at the option of the stockholder (“Optional Conversion”); or. (b) The company prefers that the percentage required is not so high as to make obtaining approval burdensome.

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Term Sheet Dilution Ratchet Preferred Stock 35