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How does it make sense that the investors get their money back AND get a % of the remaining money equal to their equity? They own half the company, shouldn't t

How does it make sense that the investors get their money back AND get a % of the remaining money equal to their equity? They own half the company, shouldn't they simply get half of the total proceeds of the acquisition?

evgen 17y ago
Welcome to the world of preferred shares vs common shares and "liquidation preferences"...
- jackowayed 17y ago
  Is that how pretty much all investment deals are done? or are some done ... rationally?
  - drusenko 17y ago
    it depends on how much leverage you have when you close the deal. participating preferred shares are definitely ugly, but depending on your circumstances, you might not have a choice.
  - gyardley 17y ago
    That depends on your definition of 'rationally'. Sometimes preferred will be fully-participating preferred, and the investors will get their money back and then take a share of what's left equal to their ownership. Sometimes preferred will be non-participating preferred, and the investors can choose between getting their money back or converting their preferred to common and getting a share equal to their ownership. Never ever will a VC do a deal where they don't get at least 100% of their money back before common stock holders (aka you) see a dime. Complicating this is that 'getting their money back' is actually just a 1x liquidation preference - and while 1x is common (the VCs get 1x their money back before you get anything), it's possible for this preference to be higher. If there's a 2x liquidation preference, the VCs get 2x their money back before the common gets anything. If there's a 2x liquidation preference and the stock is fully-participating preferred, the VC gets 2x their money back and then a share of whatever's left equal to their ownership. Early-stage rounds are often relatively simple and more 'rational' - it's multiple rounds with many different investors that make things interesting. Brad Feld's 'Term Sheet Series' is the best resource I know of for basic definitions of all this stuff: http://www.feld.com/blog/archives/term_sheet/ http://www.feld.com/blog/archives/term_sheet/
  - enjo 17y ago
    This is why having somebody who has a lot of pull in the venture world is very important. The difference in negotiating leverage is incredible. I've been a part of deals that had no preferred stock and no liquidation preferences at all for the investing firms. Why? Because the guy on our side had done a lot of deals before and had a ton of leverage. Having that guy on your board, and actively involved in the deals themselves is huge if your taking on institutional money.
  - dustingetz 17y ago
    it doesn't really matter--if deals were done 'rationally', the numbers would get worse and the net effect would be the same. just make sure you're well informed..

evgen 17y ago

Welcome to the world of preferred shares vs common shares and "liquidation preferences"...

jackowayed 17y ago
Is that how pretty much all investment deals are done? or are some done ... rationally?
- drusenko 17y ago
  it depends on how much leverage you have when you close the deal. participating preferred shares are definitely ugly, but depending on your circumstances, you might not have a choice.
- gyardley 17y ago
  That depends on your definition of 'rationally'. Sometimes preferred will be fully-participating preferred, and the investors will get their money back and then take a share of what's left equal to their ownership. Sometimes preferred will be non-participating preferred, and the investors can choose between getting their money back or converting their preferred to common and getting a share equal to their ownership. Never ever will a VC do a deal where they don't get at least 100% of their money back before common stock holders (aka you) see a dime. Complicating this is that 'getting their money back' is actually just a 1x liquidation preference - and while 1x is common (the VCs get 1x their money back before you get anything), it's possible for this preference to be higher. If there's a 2x liquidation preference, the VCs get 2x their money back before the common gets anything. If there's a 2x liquidation preference and the stock is fully-participating preferred, the VC gets 2x their money back and then a share of whatever's left equal to their ownership. Early-stage rounds are often relatively simple and more 'rational' - it's multiple rounds with many different investors that make things interesting. Brad Feld's 'Term Sheet Series' is the best resource I know of for basic definitions of all this stuff: http://www.feld.com/blog/archives/term_sheet/ http://www.feld.com/blog/archives/term_sheet/
- enjo 17y ago
  This is why having somebody who has a lot of pull in the venture world is very important. The difference in negotiating leverage is incredible. I've been a part of deals that had no preferred stock and no liquidation preferences at all for the investing firms. Why? Because the guy on our side had done a lot of deals before and had a ton of leverage. Having that guy on your board, and actively involved in the deals themselves is huge if your taking on institutional money.
- dustingetz 17y ago
  it doesn't really matter--if deals were done 'rationally', the numbers would get worse and the net effect would be the same. just make sure you're well informed..