4 ms·

Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any wa

Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any way other than spectacular success. It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.

adventured 8y ago
I agree, I don't expect any shift against preferred shares (although I'll always advocate that direction). I do think ground can be reclaimed on the liquidity preferences. That particular area in VC today is so frequently egregious I don't think it would be very difficult to rapidly improve it.
sonnyblarney 8y ago
1x preference I think has meaning and it's reasonable. Basically, the VC's are 'getting their money back first' - after all, they put the money in. So if they put $1M in and the company sells for $1M ... should they only get $200K back? Or their $1M? Is the question. Arguments can be made either way, but a 1x preference I think is something quite fundamentally different from multiples of preference.
jasonkwon 8y ago
Yeah excessive preferences do exactly this. But it's not the preference mechanism as much as what the preference does in relation to business value. Assuming liquidation preferences are 1x, what it means is that the company needs to build value that is well in excess of the amount that's been raised. The reason people end up surprised is that the amount raised is not always transparent, nor is the value of the business.
privateSFacct 8y ago
Participating preferences are bogus - obviously, as are > 1x in most cases. This term sheet is nonparticipating 1x. Despite the first comment in this chain, this is actually a very reasonable approach, and preferred stockholder is always going to have a preference - or there would be no point in being preferred.

adventured 8y ago

I agree, I don't expect any shift against preferred shares (although I'll always advocate that direction). I do think ground can be reclaimed on the liquidity preferences. That particular area in VC today is so frequently egregious I don't think it would be very difficult to rapidly improve it.

sonnyblarney 8y ago

1x preference I think has meaning and it's reasonable. Basically, the VC's are 'getting their money back first' - after all, they put the money in. So if they put $1M in and the company sells for $1M ... should they only get $200K back? Or their $1M? Is the question. Arguments can be made either way, but a 1x preference I think is something quite fundamentally different from multiples of preference.

jasonkwon 8y ago

Yeah excessive preferences do exactly this. But it's not the preference mechanism as much as what the preference does in relation to business value. Assuming liquidation preferences are 1x, what it means is that the company needs to build value that is well in excess of the amount that's been raised. The reason people end up surprised is that the amount raised is not always transparent, nor is the value of the business.

privateSFacct 8y ago

Participating preferences are bogus - obviously, as are > 1x in most cases. This term sheet is nonparticipating 1x. Despite the first comment in this chain, this is actually a very reasonable approach, and preferred stockholder is always going to have a preference - or there would be no point in being preferred.