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Question about slide 16: Why is selling preferred shares is more beneficial to founders than convertible debt?

by lecha 16y ago

gojomo 16y ago
From the transcript: Naval: Generally, even in the startup side, it’s probably better to do a preferred round because these are the times to set your terms very favorably for yourself, and they form a precedent for what happens when you do later rounds, whereas if you’re negotiating, if your first negotiation is with a VC you’re not going to set yourself the friendliest terms. So there’s nothing wrong with doing a preferred round, it’s just that the expense is slightly higher, but it’s not tremendously higher.
- lecha 16y ago
  Presumably the "terms" in "set your terms very favorably for yourself" refers to valuation. Seems like the premise here is that VCs will actually take that valuation into account during the round A. How common is that? (versus VCs trying to set the valuation regardless of valuation of the round done without them)
  - gojomo 16y ago
    Actually, no; the valuation is the one thing definitely renegotiated every round. (Prior numbers are only psychologically important to the insiders; there's no expectation later investors need to respect them.) Instead, the terms referred to are all the other things that make stock 'preferred', and having an existing set of preferred stockholders makes it a little harder for later VCs to introduce new and different preferences. (And if they do, they may need to cut in the prior preferreds.) The transcript has more details.
cperciva 16y ago
Convertible debt, being debt, has an expiry date where it must be repaid (if it isn't converted). This could result in founders forfeiting their entire company if they can't repay the debt. Preferred stock, in contrast, acts like convertible debt with an infinite expiry date -- presuming, of course, that there aren't terms allowing the investor to force an exit at some point.
- joshu 16y ago
  Convertible notes can have a clause that they turn into preferred at a specific valuation after a set amount of time. So this is not correct. I'm really not sure how preferred acts "like" convertible debt. They are radically different things. The main value of a convert is a) nobody really needs to lead, as it is usually drafted by the startup, b) it is cheaper and easier on the leg a side, and c) it doesn't set a valuation on the company.

Question about slide 16: Why is selling preferred shares is more beneficial to founders than convertible debt?

by lecha 16y ago

Question about slide 16: Why is selling preferred shares is more beneficial to founders than convertible debt?

From the transcript: Naval: Generally, even in the startup side, it’s probably better to do a preferred round because these are the times to set your terms very favorably for yourself, and they form a precedent for what happens when you do later rounds, whereas if you’re negotiating, if your first negotiation is with a VC you’re not going to set yourself the friendliest terms. So there’s nothing wrong with doing a preferred round, it’s just that the expense is slightly higher, but it’s not tremendously higher.

lecha 16y ago
Presumably the "terms" in "set your terms very favorably for yourself" refers to valuation. Seems like the premise here is that VCs will actually take that valuation into account during the round A. How common is that? (versus VCs trying to set the valuation regardless of valuation of the round done without them)
- gojomo 16y ago
  Actually, no; the valuation is the one thing definitely renegotiated every round. (Prior numbers are only psychologically important to the insiders; there's no expectation later investors need to respect them.) Instead, the terms referred to are all the other things that make stock 'preferred', and having an existing set of preferred stockholders makes it a little harder for later VCs to introduce new and different preferences. (And if they do, they may need to cut in the prior preferreds.) The transcript has more details.

cperciva 16y ago

Convertible debt, being debt, has an expiry date where it must be repaid (if it isn't converted). This could result in founders forfeiting their entire company if they can't repay the debt. Preferred stock, in contrast, acts like convertible debt with an infinite expiry date -- presuming, of course, that there aren't terms allowing the investor to force an exit at some point.

joshu 16y ago
Convertible notes can have a clause that they turn into preferred at a specific valuation after a set amount of time. So this is not correct. I'm really not sure how preferred acts "like" convertible debt. They are radically different things. The main value of a convert is a) nobody really needs to lead, as it is usually drafted by the startup, b) it is cheaper and easier on the leg a side, and c) it doesn't set a valuation on the company.