5 ms·

Liq prefs vanished during the ZIRP and I haven’t seen them return…yet. But the founders do have some leverage. If there is no incentive to do the deal they ca

by gumby 3y ago

Liq prefs vanished during the ZIRP and I haven’t seen them return…yet. But the founders do have some leverage. If there is no incentive to do the deal they can just… not cause the deal to happen (different from blocking it, just not working on it). This is the same reasons you see big pay packets for the execs when a company is doing poorly or is bankrupt: otherwise they could just go do something else (get a different job). The poor guy on the assembly line may not have the same option.

yieldcrv 3y ago
maybe in Silicon Valley, but in New England and other less mature markets nothing has ever changed feel free to change my view, for anyone passing by
- wmf 3y ago
  If you won't move to get materially better funding I guess you deserve what happens next.
- pclmulqdq 3y ago
  New England tends to have startup companies that are either biotechs or hard techs. It's not surprising to have to take bad terms for those companies.
  - gumby 3y ago
    FWIW I have started both in Silicon Valley and never had to take unfavorable terms like that.
- gumby 3y ago
  I’ve only started companies in Silicon Valley (not even in SF once it started to get tech too) but have been on board in NY, Cambridge MA, and Europe. As a broad generalization: investors in Northern California are more afraid of missing out on the upside than losing some in the downside. The further east you go the more risk averse they get, until by the time you get to Europe the terms tend to be quite abusive because the investors are so worried about losing their money.
Finbarr 3y ago
1x non participating is still the standard in most venture deals for companies doing reasonably well. But every dollar spent by startups essentially builds the preference against them. If you raise and don't spend the money, the balance sheet can be used to "offset" the liquidation preference in a sale.
- pclmulqdq 3y ago
  I mean, every dollar you spend is a dollar off your balance sheet, so a company with $1 million more in cash is theoretically worth $1 million more. That is what "offsets" the liquidation preference.
- paulddraper 3y ago
  That is the standard and anyone not in a firesale should expect that m But the reason you raise is because you can turn each dollar into 1+ dollars of enterprise value. If you raise and don't spend... You've accomplished nothing except throwing some money at lawyers.
  - Finbarr 3y ago
    Sure- the happy case with VC is that companies raise and spend the money to make more. The reality case is that many companies struggle to do that, and will burn a ton of money in the process, making the liquidation preference much more painful.
    - paulddraper 3y ago
      That's right. Raising money raises the stakes. It raises the ceiling but also the floor. Be careful of getting buried.
- sb8244 3y ago
  I think 1x non participating is a fair deal, but watch out for anything other than that. (I wouldn't take a job if there was anything more than that. And it is something I'd ask the founders.)
dheera 3y ago
If you're on really shitty acquisition terms like this, to the point where you are getting no payout for your hard work, one way you can get a small payout is to negotiate your employment contract with the new parent company to be very, very good. Make sure they give you and all employees a nice big sign on bonus and salary. They can deduct that from the proposed acquisition price. Is it ethical? I say yes, you should get paid more than $0 for your hard work to be handed over. Should the investors get a payout too? Yes, but they shouldn't be getting 100% of it, ever.
- Finbarr 3y ago
  You can also get a carve-out of the deal proceeds.
- ojbyrne 3y ago
  First thing I thought of after reading this - I wonder did the existing founders/employees get something like this? I suspect at least some of them did.
- choppaface 3y ago
  And makes sure your sign-on bonus has no clawbacks. Make it a payment condition of the contract. The bonus is for your signature not your warranty service.
- yieldcrv 3y ago
  from what I can tell, founders are often really inept in this regard they “have a guy” for this stuff and it’s completely random luck if something beneficial financially occurs to them employees are simultaneously inept and believing the founder about anything, while also having a lack of transparency even if they aren’t inept
deleted 3y ago
[deleted]

by gumby 3y ago

yieldcrv 3y ago

maybe in Silicon Valley, but in New England and other less mature markets nothing has ever changed feel free to change my view, for anyone passing by

wmf 3y ago
If you won't move to get materially better funding I guess you deserve what happens next.
pclmulqdq 3y ago
New England tends to have startup companies that are either biotechs or hard techs. It's not surprising to have to take bad terms for those companies.
- gumby 3y ago
  FWIW I have started both in Silicon Valley and never had to take unfavorable terms like that.
gumby 3y ago
I’ve only started companies in Silicon Valley (not even in SF once it started to get tech too) but have been on board in NY, Cambridge MA, and Europe. As a broad generalization: investors in Northern California are more afraid of missing out on the upside than losing some in the downside. The further east you go the more risk averse they get, until by the time you get to Europe the terms tend to be quite abusive because the investors are so worried about losing their money.

Finbarr 3y ago

1x non participating is still the standard in most venture deals for companies doing reasonably well. But every dollar spent by startups essentially builds the preference against them. If you raise and don't spend the money, the balance sheet can be used to "offset" the liquidation preference in a sale.

pclmulqdq 3y ago
I mean, every dollar you spend is a dollar off your balance sheet, so a company with $1 million more in cash is theoretically worth $1 million more. That is what "offsets" the liquidation preference.
paulddraper 3y ago
That is the standard and anyone not in a firesale should expect that m But the reason you raise is because you can turn each dollar into 1+ dollars of enterprise value. If you raise and don't spend... You've accomplished nothing except throwing some money at lawyers.
- Finbarr 3y ago
  Sure- the happy case with VC is that companies raise and spend the money to make more. The reality case is that many companies struggle to do that, and will burn a ton of money in the process, making the liquidation preference much more painful.
  - paulddraper 3y ago
    That's right. Raising money raises the stakes. It raises the ceiling but also the floor. Be careful of getting buried.
sb8244 3y ago
I think 1x non participating is a fair deal, but watch out for anything other than that. (I wouldn't take a job if there was anything more than that. And it is something I'd ask the founders.)

dheera 3y ago

If you're on really shitty acquisition terms like this, to the point where you are getting no payout for your hard work, one way you can get a small payout is to negotiate your employment contract with the new parent company to be very, very good. Make sure they give you and all employees a nice big sign on bonus and salary. They can deduct that from the proposed acquisition price. Is it ethical? I say yes, you should get paid more than $0 for your hard work to be handed over. Should the investors get a payout too? Yes, but they shouldn't be getting 100% of it, ever.

Finbarr 3y ago
You can also get a carve-out of the deal proceeds.
ojbyrne 3y ago
First thing I thought of after reading this - I wonder did the existing founders/employees get something like this? I suspect at least some of them did.
choppaface 3y ago
And makes sure your sign-on bonus has no clawbacks. Make it a payment condition of the contract. The bonus is for your signature not your warranty service.
yieldcrv 3y ago
from what I can tell, founders are often really inept in this regard they “have a guy” for this stuff and it’s completely random luck if something beneficial financially occurs to them employees are simultaneously inept and believing the founder about anything, while also having a lack of transparency even if they aren’t inept

deleted 3y ago

[deleted]