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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 profita
by byrneseyeview 19y 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 19y 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 19y agoIs there any reason they don't use different classes of common?
- cperciva 19y agoFor 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.