3 ms·

Liquidation preferences are wiped out in an IPO. What's more relevant are "ratchets" which were mentioned in the article.

ghshephard 11y ago
Is it always the case that liquidation preferences are wiped out in an IPO? http://www.vcdeallawyer.com/2010/02/15/understanding-liquidation-preferences/ http://www.vcdeallawyer.com/2010/02/15/understanding-liquida... suggests otherwise. The Series Preferred investors will have a priority in receiving distributions from a liquidation, sale, merger, IPO or dissolution. If it were the case that an IPO was treated differently than a sale, that would suggest to me that preferred shareholders might be strongly at odds with the common shareholders, when it came to decide whether to IPO or simply sell the company. This was a much better article, http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and-unicorn-valuations/ http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and... - and it captures the use of ratchets - which seem to me a kind of IPO liquidation preference.
- hobbyjogger 11y ago
  Yes, whoever VC deal lawyer is needs to work on more late stage deals. An IPO is not a liquidation event - it's just another funding round. There are no liquidation proceeds for the preference to apply to. Here's Brad Feld[1]: Jason once had an entertaining (and unenjoyable) debate during a guest lecture he gave at his alma mater law school with a partner from a major Chicago law firm (who was teaching a venture class that semester) that claimed an initial public offering should be considered a liquidation event. His theory was that an IPO was the same as a merger, that the company was going away, and thus the investors should get their proceeds. Even if such a theory would be accepted by an investment banker who would be willing to take the company public (no chance in our opinion), it makes no sense as an IPO is simply another funding event for the company, not a liquidation of the company. However, in most IPO scenarios, the VCs “preferred stock” is converted to common stock as part of the IPO, eliminating the issue around a liquidity event in the first place. [1]http://www.feld.com/archives/2005/01/term-sheet-liquidation-preference.html http://www.feld.com/archives/2005/01/term-sheet-liquidation-...
  - ghshephard 11y ago
    So - as a result, the VCs may be in conflict with management/common shareholders when it comes to making a decision between selling the company (and collecting their liquidation preference) versus an IPO (in which the VCs lose all their seniority) - which is why the ratchet is in place, to protect that preferential treatment?
    - hobbyjogger 11y ago
      In the vast majority of deals, collecting your liquidation preference is a sort of soft landing - the VCs just get their money back (without interest). It's much better for everyone if there's a big exit (either a high priced acquisition or selling shares on NYSE after an IPO) in which case the VC will convert to common and get 5x or 10x or what have you. That's not to overlook the host of differing incentives between preferred and common-which are numerous and often even intentional. Ratchets are closer to antidilution than they are to liqpref.
    - lmm 11y ago
      I don't think it's necessarily that specific? The ratchet gives the VCs an advantage if the IPO prices poorly, the liquidity preference gives the VCs an advantage if the company is sold, you're not wrong, but I don't think anyone's particularly worried about misaligned incentives from having one without the other, it's just a question of what terms the VCs and management negotiate in the funding round.
  - deleted 11y ago
    [deleted]

ghshephard 11y ago

Is it always the case that liquidation preferences are wiped out in an IPO? http://www.vcdeallawyer.com/2010/02/15/understanding-liquidation-preferences/ http://www.vcdeallawyer.com/2010/02/15/understanding-liquida... suggests otherwise. The Series Preferred investors will have a priority in receiving distributions from a liquidation, sale, merger, IPO or dissolution. If it were the case that an IPO was treated differently than a sale, that would suggest to me that preferred shareholders might be strongly at odds with the common shareholders, when it came to decide whether to IPO or simply sell the company. This was a much better article, http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and-unicorn-valuations/ http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and... - and it captures the use of ratchets - which seem to me a kind of IPO liquidation preference.

hobbyjogger 11y ago
Yes, whoever VC deal lawyer is needs to work on more late stage deals. An IPO is not a liquidation event - it's just another funding round. There are no liquidation proceeds for the preference to apply to. Here's Brad Feld[1]: Jason once had an entertaining (and unenjoyable) debate during a guest lecture he gave at his alma mater law school with a partner from a major Chicago law firm (who was teaching a venture class that semester) that claimed an initial public offering should be considered a liquidation event. His theory was that an IPO was the same as a merger, that the company was going away, and thus the investors should get their proceeds. Even if such a theory would be accepted by an investment banker who would be willing to take the company public (no chance in our opinion), it makes no sense as an IPO is simply another funding event for the company, not a liquidation of the company. However, in most IPO scenarios, the VCs “preferred stock” is converted to common stock as part of the IPO, eliminating the issue around a liquidity event in the first place. [1]http://www.feld.com/archives/2005/01/term-sheet-liquidation-preference.html http://www.feld.com/archives/2005/01/term-sheet-liquidation-...
- ghshephard 11y ago
  So - as a result, the VCs may be in conflict with management/common shareholders when it comes to making a decision between selling the company (and collecting their liquidation preference) versus an IPO (in which the VCs lose all their seniority) - which is why the ratchet is in place, to protect that preferential treatment?
  - hobbyjogger 11y ago
    In the vast majority of deals, collecting your liquidation preference is a sort of soft landing - the VCs just get their money back (without interest). It's much better for everyone if there's a big exit (either a high priced acquisition or selling shares on NYSE after an IPO) in which case the VC will convert to common and get 5x or 10x or what have you. That's not to overlook the host of differing incentives between preferred and common-which are numerous and often even intentional. Ratchets are closer to antidilution than they are to liqpref.
  - lmm 11y ago
    I don't think it's necessarily that specific? The ratchet gives the VCs an advantage if the IPO prices poorly, the liquidity preference gives the VCs an advantage if the company is sold, you're not wrong, but I don't think anyone's particularly worried about misaligned incentives from having one without the other, it's just a question of what terms the VCs and management negotiate in the funding round.
- deleted 11y ago
  [deleted]