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Sometimes, given your syndicate configuration, you have no choice but to take structure in a new round. Rather, when you have a choice between a financing at a lower valuation and a financing with all kinds of crazy structure to try to maintain a previous valuation, negotiate the best price you can but do a clean financing with no structure.
I had a discussi on with another angel investor a few months ago and he was bragging about the deal he just struck that included a 3X participating liquidationpreference. This will both reduce the number of angel investors and make it more difficult to syndicate across stage lines. The old Keep It Simple Stupid Principle.
It usually happens in a later round, when the company is in fact worth much less than the liquidationpreference overhang and insiders use a pay-to-play and a low valuation to reset the preferences and the cap table. and the investors, who put up $1m in a convertible note, get 0.1%. Sure – it happens.
First, investors will sometimes be willing to take a higher valuation if it means getting a heavier liquidationpreference. Should you accept a 3x liquidationpreference with a $15MM valuation instead of a 1x preference at a $8MM valuation? If you’re confident you’ll get a huge exit, maybe.
In investment parlance, it strictly means that new classes of stock have equal rights with prior classes in terms of liquidationpreference, voting rights, etc. Another area where I''m not sure I stand is with some of the more formal referral and syndication programs that are emerging now.
When youhear people talking about a successful angel investor, theyre notsaying "He got a 4x liquidationpreference." Mechanics Angel investors often syndicate deals, which means they join togetherto invest on the same terms. In a syndicate there is usually a"lead" investor who negotiates the terms with the startup.
I can just picture Mr. Rogers saying "Children, can you say participating preferred stock with an uncapped 3x liquidationpreference and a full ratchet?" When AngelList first launched syndicates a few years ago, I was very skeptical of the idea of angels taking carry on my investment. I got over it.
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