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You can think of preferred stock as both a loan and shares. If the current valuation is $3m and you have 10% preferred stock, then you have the choice of taking
by malanj 11y ago
You can think of preferred stock as both a loan and shares. If the current valuation is $3m and you have 10% preferred stock, then you have the choice of taking your loan back ($300k) or keeping your shares.
If things go well (company value increases), then you have to take the stock. However, if things don't go well, you get to take all of your money back before any common shareholders get any money.
So in marginal cases (where the company doesn't become very valuable), common stock tends to be worthless and preferred stock still has a chance of having some value.
- vs2370 11y agothanks again.. so basically if I negotiate to get preferred stock and if the company gets valued at 100 million, I can cash out 5 million since it would not get diluted with subsequent funding rounds..
- TuringNYC 11y agoBe careful with the assumption that you can just "cash out" -- firstly some companies simply will not let you...you are stuck with the equity for 10+ years until an IPO. If you are allowed to sell, selling in the private market is not as easy as eTrade -- you will pay a big commission and you only get what someone is willing to pay. See http://www.ft.com/intl/cms/s/0/27e9444c-0879-11e5-85de-00144feabdc0.html#axzz3jcuUW6A9 http://www.ft.com/intl/cms/s/0/27e9444c-0879-11e5-85de-00144...
- rahimnathwani 11y agoI have never heard of someone being granted preferred stock in a startup, except in return for cold hard cash. Part of the rationale of preferred stock is to protect investors from the CEO just selling the company tomorrow and taking home a large % of the cash in the bank.