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preferred shares prevent cookie cutter founder fraud. Founder raises $1M at 10 post. Founder decides to sell 6 months later for 2 mil. Investors get 200k back f
by dustingetz 2y ago
preferred shares prevent cookie cutter founder fraud. Founder raises $1M at 10 post. Founder decides to sell 6 months later for 2 mil. Investors get 200k back founder gets 1.8 mil. Now run this math for AI unicorns.
- AbstractH24 2y agoThis is a valid concern. But shifting risk entirely to those without preferential shares (typically employees) is also unfair.
- dustingetz 2y agodifferent share classes trade at different prices. Employee NSO/ISO strike price at seed stage (i.e. on a SAFE) are typically priced at a FMV of 10% (!!) of the SAFE's postmoney valuation. Also, your use here of the word "fair" has triggered a personal tick of mine so I must direct you to https://quotefancy.com/quote/3709551/Chris-Voss-The-F-word-Fair-is-an-emotional-term-people-usually-exploit-to-put-the-other https://quotefancy.com/quote/3709551/Chris-Voss-The-F-word-F...
- nradov 2y agoWhy would investors care whether a particular capital structure is "fair" to employees? As long as the company is able to recruit and retain qualified employees, any fairness or lack thereof is entirely irrelevant. But as a potential employee interviewing for a new job, if you're being offered equity compensation then you might want to inquire about share classes and liquidation preferences. It could be a factor in your decision if you have multiple options.
- ultrasaurus 2y agoOr to make it even more obvious: Founder raises $1MM then immediately sells the company for $900k :) Some terms are going to need to exist to prevent that, so the investor shares will always be preferred. Beyond that there are in fact a lot of other terms that are in some deals but not others (2x preference, pro rata, etc..)