3 ms·

I'm not sure why you framed this as an us-vs-them fight. Hypothetically, each investor has some internal valuation for your startup, and is willing to take <x>

I'm not sure why you framed this as an us-vs-them fight. Hypothetically, each investor has some internal valuation for your startup, and is willing to take <x> risk. Giving those investors preferred shares reduces that risk, which means you can theoretically get more money while giving up less of the company. Obviously you trade that for the downsides of having preferred shareholders, but that's a choice for the founders.

adventured 8y ago
The venture capitalists in implementing liquidity preferences as a commonality defined it as an us-vs-them fight. It's an aggressive risk shift onto people - the founders and employees - that are far more vulnerable in the start-up building process than the very wealthy capital class that makes up most of the VC world and its institutional money. Overwhelmingly the VCs are not your pals. They are there to make money, you should deal with them accordingly. In the best case scenario they're business partners, that's it. They don't feel bad about liquidity preferences and how that benefits them. Founders should never feel bad about fighting for the best terms they can get, the VCs will do exactly the same thing when they can - it's a core part of their job. I would take the premise a step further actually. Potential early employees should always avoid joining start-ups that have liquidity preferences that could meaningfully negatively impact their own outcome (the worse the potential impact, the greater the aversion should be). When the liquidity preference hatchet comes down, the non-founder employees typically get smashed particularly hard. Another great way to kill off liquidity preferences, is to create a competitive incentive related to employees and starve liquidity preference start-ups of talent. Start-ups should begin touting the lack of onerous liquidity preferences as a notable recruiting point re compensation packages.
- chris_va 8y ago
  > The venture capitalists in implementing liquidity preferences as a commonality defined it as an us-vs-them fight. ... You'd have to support that argument, because it is not evident. This is a mutual agreement between two informed parties. You don't have to take those terms, and you are free to offer them more common stock as a risk substitute. I also don't understand why you invoked class warfare here, which really undermines any credibility to your argument.
  - adventured 8y ago
    > This is a mutual agreement between two informed parties. YC has put so much effort into founder education over the years precisely because that frequently has tended to not be the case. Quite the opposite. I'm not sure what you're defining as informed here (mutually responsible for understanding what is being signed, sure), however I would point to knowledgeable as the more important term. The problem continues to frequently be that founders and early employees are nowhere near as mutually knowledgeable as their counterpoints in the VC world, who are elite professionals at these deals and do them for a living. There's a great statement above by @mnemotronic that summarizes the routine imbalance between the two sides: "I'm a software guy. Most of that sheet is a foreign language to me." I can sympathize, I've been dealing with VCs since the late 1990s and the terms/legal side is still an immense chore. > I also don't understand why you invoked class warfare here, which really undermines any credibility to your argument. No it doesn't, because it's not invoking class warfare, it's making a point about the typically dramatic financial condition and personal risk imbalance between the two sides (the personal damage absorbed if things go south). Founders and early employees can easily see their lives ruined if a venture fails, it's a not uncommon outcome, HN sees such stories posted regularly.

adventured 8y ago

The venture capitalists in implementing liquidity preferences as a commonality defined it as an us-vs-them fight. It's an aggressive risk shift onto people - the founders and employees - that are far more vulnerable in the start-up building process than the very wealthy capital class that makes up most of the VC world and its institutional money. Overwhelmingly the VCs are not your pals. They are there to make money, you should deal with them accordingly. In the best case scenario they're business partners, that's it. They don't feel bad about liquidity preferences and how that benefits them. Founders should never feel bad about fighting for the best terms they can get, the VCs will do exactly the same thing when they can - it's a core part of their job. I would take the premise a step further actually. Potential early employees should always avoid joining start-ups that have liquidity preferences that could meaningfully negatively impact their own outcome (the worse the potential impact, the greater the aversion should be). When the liquidity preference hatchet comes down, the non-founder employees typically get smashed particularly hard. Another great way to kill off liquidity preferences, is to create a competitive incentive related to employees and starve liquidity preference start-ups of talent. Start-ups should begin touting the lack of onerous liquidity preferences as a notable recruiting point re compensation packages.

chris_va 8y ago
> The venture capitalists in implementing liquidity preferences as a commonality defined it as an us-vs-them fight. ... You'd have to support that argument, because it is not evident. This is a mutual agreement between two informed parties. You don't have to take those terms, and you are free to offer them more common stock as a risk substitute. I also don't understand why you invoked class warfare here, which really undermines any credibility to your argument.
- adventured 8y ago
  > This is a mutual agreement between two informed parties. YC has put so much effort into founder education over the years precisely because that frequently has tended to not be the case. Quite the opposite. I'm not sure what you're defining as informed here (mutually responsible for understanding what is being signed, sure), however I would point to knowledgeable as the more important term. The problem continues to frequently be that founders and early employees are nowhere near as mutually knowledgeable as their counterpoints in the VC world, who are elite professionals at these deals and do them for a living. There's a great statement above by @mnemotronic that summarizes the routine imbalance between the two sides: "I'm a software guy. Most of that sheet is a foreign language to me." I can sympathize, I've been dealing with VCs since the late 1990s and the terms/legal side is still an immense chore. > I also don't understand why you invoked class warfare here, which really undermines any credibility to your argument. No it doesn't, because it's not invoking class warfare, it's making a point about the typically dramatic financial condition and personal risk imbalance between the two sides (the personal damage absorbed if things go south). Founders and early employees can easily see their lives ruined if a venture fails, it's a not uncommon outcome, HN sees such stories posted regularly.