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> I saw terms recently that had a 2x liquidation preference (i.e. the investors got the first 2x their money out of the company when it exited) and a 3x liquida
by mikeyouse 11y ago
> I saw terms recently that had a 2x liquidation preference (i.e. the investors got the first 2x their money out of the company when it exited) and a 3x liquidation cap (i.e. after they made 3x their money, they didn’t get any more of the proceeds).
But doesn't the 3x liquidation cap only come into play if the total exit is less than 3x? In my understanding, if the exit is greater than 3x the invested value, they then convert their preferred shares to common shares and receive their >3x proportional share in common stock thus retaining the upside of the investment.
- sama 11y agoNo, that's when the 2x comes into play. In this scenario, the investor gets the first 2x, and then after 3x doesn't make any more money.
- mikeyouse 11y agoOh wow, that is unique and very debt-like. My experience was closer to a 3x participating preferred.. Thanks for the clarification.
- mbesto 11y agoDo you think most entrepreneurs who take these debt structures realize the risk to their paper wealth? Or is it simply a matter of "we need the unicorn status to grow and hire" at any cost?
- rabbitonrails 11y agoIsn't that wrong because the preferred shares always have the right to convert into common?