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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

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.