3 ms·
Am I reading this right?: 1. Early investors overvalue a company at $X+Y 2. Investors give money and get Z preferred shares at valuation $X+Y 3. New inve
by daenz 11y ago
Am I reading this right?:
1. Early investors overvalue a company at $X+Y
2. Investors give money and get Z preferred shares at valuation $X+Y
3. New investment round, company valued at $X
4. Wealth transferred from founders and employees -> original investors to cover the difference $Y
- nickff 11y agoYes, that is how 'liquidation preferences' work.[1] I strongly recommend reading/watching Mark Suster, who (in my opinion) does a good job at explaining investors and terms.[2][3] [1] https://en.wikipedia.org/wiki/Liquidation_preference https://en.wikipedia.org/wiki/Liquidation_preference [2] http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2516 http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2516 [3] http://www.bothsidesofthetable.com/ http://www.bothsidesofthetable.com/
- hobbyjogger 11y agoJust thought I'd point out that the example given doesn't tell us anything about liquidation preferences (though of course you can assume they would be involved, since we're talking VCs here, but they don't matter). The relevant financing term here is anti-dilution. Here's Feld: http://www.feld.com/archives/2005/03/term-sheet-anti-dilution.html http://www.feld.com/archives/2005/03/term-sheet-anti-dilutio....
- not_that_noob 11y agoMore or less - new shares are issued to investors to compensate for the decrease in valuation. Very demoralizing usually.
- jsprogrammer 11y agoThis is, essentially, the private equity model.