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liquidation preference protects investors from founder fraud. say you invest $1M for 20% at 5M valuation in a preseed round where the founder has nothing and th

liquidation preference protects investors from founder fraud. say you invest $1M for 20% at 5M valuation in a preseed round where the founder has nothing and then a day later the founder liquidated the company for the value of cash assets, keeping 800k of your money. also preferred has a different voting structure, making it easier for investors to fire the CEO

thaumasiotes 4y ago
Founder fraud? If I own shares in a company, and then the company issues more shares, am I a victim of fraud? Are you actually attempting to answer my question, or are you saying something unrelated?
- dustingetz 4y ago
  The founder and investor agree on dual class stock ("common" vs "preferred") as part of the investment terms. Nothing stops a founder from incorporating with single-class share structure, but the structure exists and is standardized for good reason. Mainly, it gives the board checks and balances against the CEO so that they can force the CEO to honor their promises to the investors. In addition to "preferred" vs "common", each "Series" of preferred shares is subject to their own terms, which are established in the financing contracts per the negotiated terms of the financing. Come to think of it, this preferential treatment might be why the shares are called "preferred". Pre-seed and seed is mostly standardized but beyond that the terms of each Series of stock are custom negotiated and that's where you see things like liquidity preference, vesting, anti-dilution, dividends, rights, board seats and other control clauses, etc. If a founder were to simply say "everyone is treated the same, we all get common" that would impact the valuation and dilution, as the preferred structure is a factor in the price. In a way, the founder is saying "i'm going to give you preferred to remove your perceived downside risk so that I can keep more of the company"

thaumasiotes 4y ago

Founder fraud? If I own shares in a company, and then the company issues more shares, am I a victim of fraud? Are you actually attempting to answer my question, or are you saying something unrelated?

dustingetz 4y ago
The founder and investor agree on dual class stock ("common" vs "preferred") as part of the investment terms. Nothing stops a founder from incorporating with single-class share structure, but the structure exists and is standardized for good reason. Mainly, it gives the board checks and balances against the CEO so that they can force the CEO to honor their promises to the investors. In addition to "preferred" vs "common", each "Series" of preferred shares is subject to their own terms, which are established in the financing contracts per the negotiated terms of the financing. Come to think of it, this preferential treatment might be why the shares are called "preferred". Pre-seed and seed is mostly standardized but beyond that the terms of each Series of stock are custom negotiated and that's where you see things like liquidity preference, vesting, anti-dilution, dividends, rights, board seats and other control clauses, etc. If a founder were to simply say "everyone is treated the same, we all get common" that would impact the valuation and dilution, as the preferred structure is a factor in the price. In a way, the founder is saying "i'm going to give you preferred to remove your perceived downside risk so that I can keep more of the company"