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"The "IQ test" quote refers not to how fast they have to decide, but the amount of equity we usually ask for. In the median case it's 6%. If we take 6%, we have

by wmorein 18y ago

"The "IQ test" quote refers not to how fast they have to decide, but the amount of equity we usually ask for. In the median case it's 6%. If we take 6%, we have to improve a startup's outcome by 6.4% for them to end up net ahead. That's a ridiculously low bar. So the IQ test is whether they grasp that." In starting to write a comment on this I did a little searching and found out that YC takes common stock rather than preferred (at least according to this: http://venturebeat.com/2007/04/16/y-combinator-continued/ http://venturebeat.com/2007/04/16/y-combinator-continued/). It is interesting since the statement above is only true as long as common with no additional rights is given. I wonder what the terms of the "copycats" mentioned are -- does anyone know if they are asking for preferred or other rights for their equity?

byrneseyeview 18y ago
From a non-VC context, it sounds really weird to ask for preferred, because the usual difference is that preferred pays a fixed income if the company is profitable (and may convert into common at a fixed price) and has liquidation preference. Is getting a lower payout really worth it if you're also first in line to get paid when they shut down and sell off their Ramen stash? Many years ago, I read that the first VC investment to be called a VC investment was a $2 million convertible preferred issue -- but since it converted into 2/3rds of the common, it sounded like a way to sell common.
- cperciva 18y ago
  "Preferred" just means "different from common". Preferred stock can have almost any terms you like -- you can't sign over your firstborn to the preferred stock holders (whatever it might seem like at times), but liquidation preference, dividends, conversion to common stock, veto rights... they're all on the table. I believe that "converts to common stock if an IPO occurs" is almost one of the terms for VC-owned preferred stock.
  - byrneseyeview 18y ago
    Is there any reason they don't use different classes of common?
    - cperciva 18y ago
      For all I know, it might just be that lawyers have preconceived notions of what "preferred" stock is and what "common" stock is, and call something one or the other based on those traditions. When I've seen multiple classes of common stock, the only differences have been voting rights -- but I don't know if there are any legal limits to how much difference there can be between classes of "common" stock.

by wmorein 18y ago

byrneseyeview 18y ago

From a non-VC context, it sounds really weird to ask for preferred, because the usual difference is that preferred pays a fixed income if the company is profitable (and may convert into common at a fixed price) and has liquidation preference. Is getting a lower payout really worth it if you're also first in line to get paid when they shut down and sell off their Ramen stash? Many years ago, I read that the first VC investment to be called a VC investment was a $2 million convertible preferred issue -- but since it converted into 2/3rds of the common, it sounded like a way to sell common.

cperciva 18y ago
"Preferred" just means "different from common". Preferred stock can have almost any terms you like -- you can't sign over your firstborn to the preferred stock holders (whatever it might seem like at times), but liquidation preference, dividends, conversion to common stock, veto rights... they're all on the table. I believe that "converts to common stock if an IPO occurs" is almost one of the terms for VC-owned preferred stock.
- byrneseyeview 18y ago
  Is there any reason they don't use different classes of common?
  - cperciva 18y ago
    For all I know, it might just be that lawyers have preconceived notions of what "preferred" stock is and what "common" stock is, and call something one or the other based on those traditions. When I've seen multiple classes of common stock, the only differences have been voting rights -- but I don't know if there are any legal limits to how much difference there can be between classes of "common" stock.