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Sigh, don't presume I "don't understand", and then feed me self-serving VC rationalizations that are essentially propaganda. > " Immediately after taking the i

by MCRed 11y ago

Sigh, don't presume I "don't understand", and then feed me self-serving VC rationalizations that are essentially propaganda. > " Immediately after taking the investment founders could sell the company for the value of the cash and profit handsomely while the investor loses the bulk of their money." That's nonsensical on the face of it. If the company is worth $10M and an investor puts in $2M for %20, then the remaining equity is $8M. I don't consider selling a $10M asset for $2M (and netting %80, or $1.6M) to be "profit[ing] handsomely". It's giving up %84 of the company. Plus it's trivial to prevent this by requiring, as part of the deal terms, that a sale of the company have investor approval. Your second point presumes that there's only one class of stock. There can be preferences, such as the anti-sale clause I mentioned that common shareholders don't have. That's completely different from liquidation preferences. Your third point is silly, I'm focusing on being denied a fair deal in a liquidity even and you're talking about "Donswide protection". It is true that treating people fairly works better on the downside too. But your comment "what are you starting a company for in the first place?" makes me think you're naive and reacting as if I've dared to disagree with the common wisdom of our lords and saviors the VCs. I've been starting companies for 30 years, this is experience talking, kid.

harryh 11y ago
1) That 8M of equity in your example is theoretical value, not cash you can spend. The 1.6M is real money. There are a lot of people that would trade the former for the latter. You're right about there being other ways to deal with this, but preferences are one of the cleanest. 2) If you have different classes of stock that pay out the same in a liquidation event you aren't going to be able to get a significant difference in their value. 3) Who's to say what's fair? We're talking about capitalism not an ethics textbook. Fair is whatever you can negotiate. And providing downside protection to the people putting in the cash enables you to enhance your upside reward. If you're raising 2M on 8M pre and you're more concerned about what happens if the company liquidates at 5M than what happens if you get to 50M or 100M then I do honestly wonder why you're starting a company in the first place.

by MCRed 11y ago

harryh 11y ago

1) That 8M of equity in your example is theoretical value, not cash you can spend. The 1.6M is real money. There are a lot of people that would trade the former for the latter. You're right about there being other ways to deal with this, but preferences are one of the cleanest. 2) If you have different classes of stock that pay out the same in a liquidation event you aren't going to be able to get a significant difference in their value. 3) Who's to say what's fair? We're talking about capitalism not an ethics textbook. Fair is whatever you can negotiate. And providing downside protection to the people putting in the cash enables you to enhance your upside reward. If you're raising 2M on 8M pre and you're more concerned about what happens if the company liquidates at 5M than what happens if you get to 50M or 100M then I do honestly wonder why you're starting a company in the first place.