Startup Professionals Musings

DECEMBER 11, 2022

Experienced entrepreneurs understand investor expectations of Board representation, preferred stock, and payments based on interim milestones. Ask only for the money you can justify. Naïve expectations on funding terms and process.

Due Diligence 271

Due Diligence Intellectual Property Entrepreneur Preferred Stock 271

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 405

Valuation Liquidation Preference Pre-Money Valuation Term Sheet 405

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. In the United States, this is a limited liability corporation, or LLC. Build your time line and momentum quickly after your business' start.

Intellectual Property 120

Intellectual Property Entrepreneur Preferred Stock Stealth 120

Startup Professionals Musings

JANUARY 15, 2021

Facilitate an upgrade of founder’s common to founder’s preferred. Investors typically demand preferred stock to give them more control and first payouts, but these advantages can be at least partially offset (up to 20 percent) if you plan ahead.

Vesting 298

Vesting Dilution Stock Founder Vesting 298

Startup Company Lawyer

AUGUST 31, 2012

” As a result, Ted introduced the Series Seed preferred stock documents as an alternative to convertible debt for early stage investments. Why convertible equity is better than preferred stock. The problem. The main point is to re-think convertible debt so that it doesn’t have a repayment feature or interest.

Convertible Security 73

Convertible Security Equity Security Preferred Stock 73

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. The average valuation for angel investments is $2 million, which will get you $500,000 for 20 percent of your startup. Are you flexible on the terms of the investment?

Startup 337

Startup Preferred Stock Exit Strategy Equity 337

Gust

MAY 24, 2012

Options and warrants, when issued, are also typically exercisable for shares of Common Stock. By contrast, venture capital and angel investments normally take the form of Preferred Stock with rights and preferences set forth in the company’s Certificate of Incorporation and other governance documents.

IPO 159

IPO Equity Common Stock Stock 159

Steve Blank

APRIL 10, 2019

In the past the founders and employees were aligned with the same type of common stock grant, and it was the VCs who got preferential stock treatment. Today, if you’re an employee you’re now are at the bottom of the stock preference pile. The founders have preferential stock treatment and the VC have preferred stock.

Stock Options 335

Stock Options Stock Vesting Common Stock 335

Startup Professionals Musings

MARCH 14, 2020

Experienced entrepreneurs understand investor expectations of Board representation, preferred stock, and payments based on interim milestones. Ask only for the money you can justify. Naïve expectations on funding terms and process.

Due Diligence 308

Due Diligence Intellectual Property Preferred Stock Startup 308

Both Sides of the Table

SEPTEMBER 5, 2012

The alternative is to give investors 1,2 & 3 the exact same amount of preferred Series A stock and give investors 1 & 2 more common stock (which doesn't have liquidation preferences) to adjust for the discount. So they'll feel cheated. The third option is the one I listed below, which is what I have done.].

Ratchet 354

Ratchet Liquidation Preference Equity Stock 354

Steve Blank

APRIL 26, 2022

Some even insisted that all prior preferred stock had to be converted to common stock. For existing investors, sometimes it was a “pay-to-play” i.e. if you don’t participate in the new financing you lose. Other times it was simply a take-it-or-leave-it, here are the new terms.

Cram Down 417

Cram Down Founder Venture Capital Recapitalization 417

YoungUpstarts

AUGUST 25, 2015

Stocks are issued at the time the company is formed, and more can be issued over time. You can control the power of your company’s stock by issuing different classes. The ownership structure of an LLC is a blank slate.

LLC 100

LLC Technical Review Software Review Limited Liability Company 100

Berkonomics

MAY 23, 2024

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. How do you set the option price? Special clauses for board members and senior executives?

Early Stage 62

Early Stage Vesting Stock Options Preferred Stock 62

Startup Professionals Musings

JANUARY 29, 2018

Negotiate an upgrade from common shares to preferred stock. Investors typically demand preferred stock to give them more control and first payouts, but these advantages can be at least partially offset (up to 20 percent) if you plan ahead. Here is another case where work up front is required to make this happen.

Stock 129

Stock Vesting Preferred Stock Cofounder 129

Up and Running

SEPTEMBER 20, 2021

Furthermore, there are various forms of equity, such as preferred stock, common stock, and convertible notes, which influence the present and potential future investors. Preference shares. A class of stock with special rights as described in your startup is called preference shares. Convertible notes.

Cap Table 112

Cap Table Pre-Money Valuation Stock Options Option Pool 112

Both Sides of the Table

JULY 29, 2010

The downside is that people need to buy their stock. I talked also about 409a valuations and why common stock purchases cost less than preferred stock purchases. But if you do this early (pre VC) then the price points are pretty low. Do it early.

Venture Capital 282

Venture Capital Term Sheet Valuation Stock Options 282

Gust

JUNE 7, 2014

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.

Warrant 157

Warrant Preferred Stock Early Stage Common Stock 157

ReadWriteStart

JUNE 1, 2020

The shares given out can either be common stocks or preferred stocks. ? Debt investment. Equity investment is the most popular and most talked-about avenue for startup funding. These investments are made instead of shares or equity in your startup. Debt investment would have a repayment timeline and incur interest rates.

Startup 150

Startup Entrepreneur Elevator Pitch Seed Stage 150

Startup Professionals Musings

FEBRUARY 8, 2019

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. For example, any LLC or S-Corp can elect to be treated for tax purposes as a sole proprietorship (Schedule C), partnership (Schedule K), or as an S-Corp (Form 2553).

LLC 210

LLC Limited Liability Company Cofounder Preferred Stock 210

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. Friends and family are also often issued shares of common stock.

Preferred Stock 87

Preferred Stock Finance Common Stock Liquidation Preference 87

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.

Preferred Stock 56

Preferred Stock Term Sheet Dilution Stock 56

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.

Term Sheet 120

Term Sheet Demand Preferred Stock Liquidation Preference 120

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. (For more on working with startup lawyers, see Mark Suster’s classic post, How To Work With Lawyers At A Startup.).

Finance 178

Finance Term Sheet Preferred Stock Bridge Financing 178

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. Play with the investment numbers (increase them in column L).

Cap Table 79

Cap Table Preferred Stock Pre-Money Valuation Participating Preferred 79

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 million and $600,000 in convertible note financings.

Preferred Stock 115

Preferred Stock Silicon Valley Seed Stage Venture Capital 115

Berkonomics

FEBRUARY 3, 2022

There are clauses in preferred stock investment agreements allowing the investor in many cases to “put” the shares back to you at the purchase price plus dividends or more after a period, usually five years, if no effort is made to find a buyer or begin the IPO process.

Liquidity Event 62

Liquidity Event Preferred Stock Dividend Equity 62

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.

Early Stage 102

Early Stage Vesting Stock Options Preferred Stock 102

Hunter Walker

SEPTEMBER 29, 2022

All the preferred stock is pari passu and behaving honorably in the best interest of the company? If we can sell partially out of a position and put those proceeds into one that we believe has more incremental upside, that’s accretive to our results. We’re aligned with the founders and the rest of the cap table until we aren’t.

Venture Capital 126

Venture Capital Cap Table LP Equity 126

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.

Technical Review 110

Technical Review Technical Cofounder Valuation Pre-Money Valuation 110

YoungUpstarts

JUNE 26, 2020

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. I got a $5 million valuation on my very first startup and thought I was a millionaire because I owned half the company. I was wrong.

Finance 205

Finance Silicon Valley Valuation Startup 205

Agile VC

APRIL 17, 2011

Notes: In an IPO preferred share classes are converted into common stock, and liquidation preferences and accumulated but unpaid dividends essentially go away. One can infer valuations based on per share prices of preferred stock and oustanding common shares (~5.3M as of 12/31/09).

Pre-Money Valuation 113

Pre-Money Valuation Liquidation Preference Dividend Common Stock 113

VC Cafe

OCTOBER 23, 2010

Preferred Stock Purchase Agreement Series Seed Form SPA. Certificate of incorporation Series Seed COI (v 2.0). Investors Rights Agreement Series Seed IRA (v 2.0). Seed Term Sheet Series Seed Term Sheet (v 2.0).

Early Stage 80

Early Stage Term Sheet Preferred Stock Equity 80

View from Seed

DECEMBER 4, 2014

It’s also worth keeping in mind that regardless of how the founders’ common stock is divided, there will be future issuance of stock that will dilute the founders over the lifecycle of the company.

Equity 315

Equity Founder Sweat Equity Cofounder 315

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. It was good to see Editd, a London based fashion analytics company on the list.

Preferred Stock 84

Preferred Stock Incubator Stock Analytics 84

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 ” ).

Finance 79

Finance Preferred Stock Term Sheet Early Stage 79

Startup Professionals Musings

AUGUST 1, 2016

Experienced entrepreneurs understand investor expectations of Board representation, preferred stock, and payments based on interim milestones. Ask only for the money you can justify. Naïve expectations on funding terms and process.

Due Diligence 120

Due Diligence Intellectual Property Preferred Stock Seed Stage 120

Berkonomics

JANUARY 6, 2022

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. The order of liquidation or payout.

Dividend 62

Dividend IRR Preferred Stock Participating Preferred 62