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1) Always get an experienced lawyer to review paperwork you sign. 2) It's pretty normal for people who give you money (be it a loan or an equity investment) to
by ig1 13y ago
1) Always get an experienced lawyer to review paperwork you sign.
2) It's pretty normal for people who give you money (be it a loan or an equity investment) to get their money back before you do in event of a sale.
Imagine the situation where you raised $5m for 20% of your company and then the next day you sold the entire company for $5m. You'd get $4m and the investor would get $1m, you'd be very happy and your investor very unhappy.
Hence no rational investor would give you money without a clause that ensured that in the case of an exit that they had priority upto the amount they invested.
- YokoZar 13y agoUnless those people giving you money are employees vesting their stock options. Perhaps I've been misled, but I don't think it's common for employees to be given preferred stock.
- deleted 13y ago[deleted]
- prostoalex 13y agoIn the case where you have this situation where an employee is both putting his money by investing in a round and working to vest some ISOs, the stock he would get through the round would be whatever the round lead negotiated, the call options though would still be for common stock.
- james_alonso 13y agoRight, employees are getting common stock so they don't get to jump to the front of the line when a company is sold. But they are also paying the common stock price, which is a fraction of the price paid by the preferred stock, so it makes sense that each share they own has less rights associated with it vs. the shares the investor pays a premium for.
- comrade_ogilvy 13y agoExactly. The preferred stock is paid for with real money. The common shares I bought as an employee was at single digit pennies a share. While I am not exactly happy how I got wiped out, I did less badly than many VCs did.
- larrys 13y ago"Always get an experienced lawyer to review paperwork you sign." Always make sure you read, understand and question what the experience lawyer is telling or suggesting to you. Don't assume they will catch everything and/or will not make mistakes. They do and they will. Even jockey for who gets to draw up the agreement first. From my experience (others may differ in opinion although I'd like Grellas to weigh in on this one) it pays to have your attorney draw up the agreements (even at added expense). Then it's up to the other side to catch any issues and it's hard for the other side to insert things without you noticing (because they stand out as insertion and are obvious).
- deleted 13y ago[deleted]