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Can someone familiar with the current funding climate say if standard deals at all levels involve liquidation preference nowadays? As in, if Im considering a se
by naturalgradient 8y ago
Can someone familiar with the current funding climate say if standard deals at all levels involve liquidation preference nowadays? As in, if Im considering a seed-round, will there be any sophisticated investors doing no preference? Have talked to some investors in the scene (UK) but cannot seem to get a clear picture on this.
Is declining to accept a liquidation preference at seed level a red flag for any serious investor? What about subsequent rounds?
- woah 8y agoJust raised a seed on convertible notes, was never asked for any kind of preference
- JumpCrisscross 8y ago> Just raised a seed on convertible notes, was never asked for any kind of preference Notes are debt. They're inherently higher than stock on the capital structure. They may convert into shares with no preference. But as long as they're notes, they're higher than even preferences shares.
- Dwolb 8y agoSure but those preferences only really affect equity payouts when the company’s in distress. When selling the a non-distressed company, equity will receive cash.
- JumpCrisscross 8y ago> those preferences only really affect equity payouts when the company’s in distress Liquidation preferences and bankruptcy priority only matter when a company is distressed.
- Dwolb 8y agoIs it not possible to sell a company that is currently profitable, cash flow positive, and is worth less than what investors had put in?
- sytse 8y agoThat ask will happen on conversion by the A round investor.
- JumpCrisscross 8y ago> Is declining to accept a liquidation preference at seed level a red flag for any serious investor? Investors may be receptive to nixing liquidation preferences, particularly early on, if the founder agrees in writing to take no employment benefits. Asking an investor to relinquish their downside protection while retaining your own (a cash salary) is cause for further questions. That said, it's awkward to (a) ask for capital while (b) prominently communicating that you see the risk of selling the business below where they've valuing it as being non-negligible. If you, as the founder, have that little faith in the venture, a better conversation may be hand about what can be done to increase your confidence in it. Liquidation preferences aren't required, particularly later on. But you’ll give up on other terms by filtering for investors who don't care for them.
- naturalgradient 8y agoThank you for the response. It seems like liquidation preferences really come into play at growth stage when things get 'messier' due to capital needs, and declining them at seed round would send a very negative signal because the valuation must grow for any kind of success beyond the seed round?
- greglindahl 8y agoFrom what gets printed in the press, it appears that lots of unicorns are having to agree to pretty high liquidation preferences in their latest rounds.
- majc2 8y agoHaving recently raised a seed in the UK; there is simply no reason to accept any sort of prefs for a seed round. There is plenty of SEIS/EIS money about - and part of those tax relief schemes is the investors need to take ords or they lose the tax-relief. Your mileage may vary etc.
- walshemj 8y agoAnd generally the UK is stricter on multishare classes - and approved share schemes have some strict rules on what sort of shares employees must be issued with.
- lifeisstillgood 8y agoIs there any good resources on raising seed in UK (besides family / friends). ?
- kenneth 8y agoAs an investor who invests at the Seed to Series A stage, I can tell you that a non-participating 1x liquidation preference is standard. I would refuse to invest in any deals that didn't include it, but won't be asking for anything more. I think it's a pretty fair term. It prevents investors getting screwed by a sale for less than the round valuation, which could look quite attractive to a founder who could get their first million, screwing their investors in the process.
- greglindahl 8y agoAs a comparison, the startup I helped found in 2004 had a 2X liquidation preference -- that was a bad time to raise money. And as a founder, I'll happily take 1X.
- naturalgradient 8y agoThank you this is a helpful data point.
- walshemj 8y agoIn the USA or UK ? The UK tends to have stronger protection for employee shares -not that there haven't been some dodgy deals BAXI getting taken over by carpetbaggers and screwing the owners is a well know case in the UK. And I have been on the receiving end of losing $1,000,000 at Poptel if only ICANT weren't such a bunch of ass%^&&S and the CoOp had been a bit more tech savvy - still water under the bridge. Poptel was a worker co op btw so I had .5%
- deleted 8y ago[deleted]
- kenneth 8y agoThis is in the USA. While I've invested in a few foreign companies, I'm not familiar with how other countries deviate generally from SV norms.