That depends on your definition of 'rationally'. Sometimes preferred will be fully-participating preferred, and the investors will get their money back and the

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/