Both Sides of the Table

MAY 30, 2015

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.

Liquidation Preference 150

Liquidation Preference Ratchet Angel Investor Entrepreneur 150

The Equity Kicker

OCTOBER 22, 2012

Many of the conversations and talks there revolved around the importance of having big ambition and of doing quality work. Betting too early on a billion dollar outcome and building up a big liquidation preference can turn what would otherwise have been a decent success into a failure.

Liquidation Preference 134

Liquidation Preference Distribution Web Conversion 134

Both Sides of the Table

MARCH 1, 2016

At the Upfront Summit in early February, we had a chance to have many off-the-record conversations with Limited Partners (LPs) who fund Venture Capital (VC) funds about their views of the market. In bad markets, they can be wiped out by recaps and liquidation preferences unless they save enough reserves to protect their positions.

Venture Capital 150

Venture Capital LP Silicon Valley Marketing 150

Scott Edward Walker

JUNE 9, 2011

Conversion Rights What Are Conversion Rights? As many of you know, VC investors are typically issued shares of preferred stock, not common stock. A conversion right is the right to convert shares of preferred stock into shares of common stock. There are two types of conversion rights: optional and mandatory.

Term Sheet 60

Term Sheet Conversion Rights Venture Capital Liquidation Preference 60

abovethecrowd.com

FEBRUARY 24, 2015

Lost in this conversation are the dramatic differences between a high priced private round and an IPO. Conversely, these late stage private rounds have no such pageantry or process. Most private company financings involve the use of preferred stock with liquidation preferences.

IPO 40

IPO Liquidation Preference Valuation Technical Review 40

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. Take liquidation preferences head on.

Venture Capital 289

Venture Capital Liquidation Preference Common Stock Dividend 289

Both Sides of the Table

SEPTEMBER 8, 2012

It has both a “full rachet” and “multiple liquidation preferences.” They share in liquidation preferences pari passu and they vote as a single class. This is occasionally how convertible notes are structured at the time of conversion anyways. ” I wrote about it here.

Pre-Money Valuation 294

Pre-Money Valuation Finance Liquidation Preference Warrant 294

Both Sides of the Table

FEBRUARY 15, 2016

How much your company should burn should also have a direct correlation with whom your existing investors are and I strongly advise that you have open conversations with them about their comfort levels and also the level of support you are likely to receive going forward.

Burn Rate 150

Burn Rate Cap Table Valuation Software Review 150

Feld Thoughts

FEBRUARY 9, 2016

Much of it is very short term focused and, like a giant tractor beam, draws the conversation into a very short time horizon (as in days or weeks). I’ve seen every imaginable type of liquidation preference structure, pay-to-play dynamic, preferred return, ratchet, share/option bonus, option repricing, and carveout.

Cap Table 70

Cap Table Down Round Liquidation Preference Founder 70

Gust

SEPTEMBER 17, 2014

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. These are all real conversations. I’m bored of it.

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

SoCal CTO

JULY 13, 2010

" 8 Questions to Ask When Interviewing at a Startup - Instigator Blog , June 18, 2010 Job interviews are meant to be conversations. liquidation preference. " And in the spirit of how to get your ideas to happen, they asked me to talk about entrepreneurship and the myriad ways you can "be your own boss."

Cofounder 175

Cofounder Technical Cofounder Term Sheet Startup 175

Both Sides of the Table

JANUARY 21, 2010

You never got around to agreeing exact equity splits but you had many conversations about it. They’ll invite you out to events in which you’ll meet their other clients, you can get to know them socially and hopefully develop a real mentorship relationship where every conversation is not on the clock.

Southern California 318

Southern California Silicon Valley IP Stock Options 318

Feld Thoughts

JUNE 2, 2015

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.”.

Liquidation Preference 70

Liquidation Preference Cap Table Angel Investor Post-Money Valuation 70

ithacaVC

JUNE 3, 2015

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. Bottom line: the note holder chooses whichever option gives a lower price for conversion. So, the note holders pay $.30

Liquidation Preference 40

Liquidation Preference Pre-Money Valuation Dilution Valuation 40

Up and Running

AUGUST 17, 2015

C Corp versus LLC, non-competes, liquidation preferences, preferred versus common stock, and so on). During our fundraising conversations, I’ve been constantly amazed by the percent of people I’ve spoken to in the venture capital community that have MBAs.

Entrepreneur 60

Entrepreneur Cofounder Angel Investor eCommerce 60

Startup Professionals Musings

JANUARY 27, 2012

This clause attempts to protect the conversion price of stock of Angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “down” round. Liquidation preference. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Term Sheet 223

Term Sheet Pre-Money Valuation Due Diligence Angel Investor 223

Scott Edward Walker

APRIL 22, 2012

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. Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note’s conversion to equity?

Pre-Money Valuation 72

Pre-Money Valuation Finance Liquidation Preference Founder 72

Tim Keane

JANUARY 12, 2010

.   At the financial level , and assuming a harvest of the investment in the company without the need for further financing, two terms stand out as driving economics: the dividend and the liquidation preference. Second a liquidation preference and a participation.   First , dividends.

Term Sheet 68

Term Sheet Valuation Dividend Liquidation Preference 68

Austin Startup

AUGUST 1, 2017

First, investors will sometimes be willing to take a higher valuation if it means getting a heavier liquidation preference. Should you accept a 3x liquidation preference with a $15MM valuation instead of a 1x preference at a $8MM valuation? If you’re confident you’ll get a huge exit, maybe.

Liquidation Preference 48

Liquidation Preference Common Stock Valuation Silicon Valley 48

Startup Professionals Musings

SEPTEMBER 14, 2010

This clause attempts to protect the conversion price of stock of angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “down” round. Liquidation preference. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Term Sheet 227

Term Sheet Pre-Money Valuation Due Diligence Post-Money Valuation 227

Gust

OCTOBER 17, 2011

This clause attempts to protect the conversion price of stock of angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “down” round. Liquidation preference. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Term Sheet 158

Term Sheet Pre-Money Valuation Due Diligence Angel Investor 158

David Teten

AUGUST 21, 2019

This includes the application process, phone calls with us, conversations with co-founders, investors and counsel, etc. But this is the same for a VC round with a liquidation preference. BK Landland observed, “At Lighter, most entrepreneurs we fund spend 10 total hours of work over 3-6 weeks to get funding. Soup to nuts.

Revenue 60

Revenue Liquidation Preference Equity Cofounder 60

Startup Company Lawyer

JANUARY 9, 2011

Tweaking convertible debt so that common stock (instead of preferred stock) is issued for the conversion discount in order to limit liquidation preference overhang. Convertible debt with a price cap preserves the investor’s “equity&# ownership, but gives the investor extra liquidation preference.

Liquidation Preference 57

Liquidation Preference Finance Preferred Stock Common Stock 57

ithacaVC

DECEMBER 13, 2013

BUT, make sure you have a very clear listing of the debt, who owns it, when it was issued, interest rate and any applicable conversion discount. This clearly illustrates the power of a conversion discount. But it takes a good and long conversation between the founders and Series Seed holders. Why is this important?

Cap Table 67

Cap Table Pre-Money Valuation Option Pool Liquidation Preference 67

Scott Edward Walker

APRIL 9, 2012

Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note’s conversion to equity? (ii) ii) what happens if the maturity date is reached prior to the note’s conversion to equity? Are the Series Seed and Other Standardized Forms Really as Fast and Cheap as Convertible Notes?

Preferred Stock 87

Preferred Stock Finance Common Stock Liquidation Preference 87

The Startup Lawyer

JANUARY 10, 2011

Terms like the option pool , liquidation preference , and board composition are just a few other investment terms that have a meaningful impact on your startup. Of course, you can re-negotiate the pre-money and/or investment amount, but it still makes for potentially awkward conversations and/or feelings of mistrust.

Term Sheet 64

Term Sheet Pre-Money Valuation Liquidation Preference Option Pool 64

ithacaVC

NOVEMBER 12, 2011

And, typically, the note holder is given a discount on the conversion price. So, the debt holder ends up with Series A stock with a $1 value (and usually a 1X liquidation preference, in this hypo $1) for $.85. Conversion Discount vs Warrant Coverage. 85 a share (just divide the debt amount plus interest by $.85).

Warrant 49

Warrant Liquidation Preference Equity Stock 49

genylabs.typepad.com

SEPTEMBER 24, 2011

where your stock sits in the liquidity preference stack. what rights and preferences the founders and the other investors have. You can follow this conversation by subscribing to the comment feed for this post. what kind of stock you are getting. what your rights are. TrackBack URL for this entry: [link].

Equity 40

Equity Technical Review San Jose Stock 40

Scott Edward Walker

SEPTEMBER 14, 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 non-contractual rights redemption (..)

Term Sheet 76

Term Sheet Due Diligence Liquidation Preference Redemption 76

Both Sides of the Table

SEPTEMBER 28, 2013

The don’t understand VC liquidation preferences or multiple return expectations. This is a real conversation I have ALL the time even still. You take the meeting but you’re not really pursuing it. But staff can’t make the delineation in their heads. They see the dollar signs and the victory. ” Yes.

Startup 417

Startup Dilution San Diego Stock Options 417

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 (..)

Term Sheet 49

Term Sheet Redemption Venture Capital San Francisco 49

Startup Company Lawyer

JANUARY 31, 2011

Automatic conversion: on a $1M equity financing with no conversion discount and no price cap , provided that the transaction documents provide for a right to purchase a pro rata share of future financings. (I Optional equity conversion: on other equity financings with no conversion discount and no price cap.

Preferred Stock 60

Preferred Stock Liquidation Preference IPO Common Stock 60

Scott Edward Walker

JULY 27, 2011

Introduction For the past few months, I’ve been discussing the rights of VC investors in connection with preferred stock financings, including the following: liquidation preferences anti-dilution provisions dividends Board control protective provisions drag-along provisions pay-to-play and pull-up provisions conversion rights redemption rights All (..)

Delaware 49

Delaware Liquidation Preference Redemption Los Angeles 49

K9 Ventures

MARCH 23, 2011

The typical fix for this problem is to put in a cap in the note for the pre-money price for conversion. Before the era of capped notes, entrepreneurs preferred to do notes because the note essentially deferred the valuation of the company. What percent of the company should the note holder get on conversion?

Pre-Money Valuation 132

Pre-Money Valuation Valuation Equity Liquidation Preference 132

Hunter Walker

NOVEMBER 23, 2015

Lots of them are about growth – I explained some things like Dunning-Kruger and how it relates to impostor syndrome, sometimes I’ll talk about design philosophy and how to think about what needs to be done first (we had a long conversation about “first things first” at one point).

Engineer 48

Engineer Liquidation Preference AJAX IPO 48

Pascal's View

DECEMBER 30, 2012

The book makes a great contribution to practitioners on both sides of the table by shining a light on the difficult conversations that entrepreneurs need to have with their colleagues and with their investors. Many of these issues come to the foreground once entrepreneurs have raised money from VC’s.

Cofounder 34

Cofounder Liquidation Preference Vesting Equity 34

VC Adventure

AUGUST 30, 2010

The most common forms of investment in early stage business are convertible debt and preferred equity. Typically this conversion is at a discount to the next equity round (to compensate the debt investors for their risk) and sometimes carries warrants (same rational) or a cap on the equity price that the debt converts into.

Angel Investor 103

Angel Investor Early Stage Equity Valuation 103