Liquidation preferences have always seemed to be a case of having your cake and eating it too for investors. I'm guessing the original intent was strictly for downside protection. But it's become a way for investors to guarantee a certain upside--risk mitigation at the expense of common. Put another way, it's terms like these that value capital over people. A common example I give when explaining it to incredulous entrepreneurs is this (let me know if I have it right): say you raise $1 million at a $4 million pre, giving a total of $5 million., so 20% to the VC. Then you exit for $10 million--double, right? So what's the VC take? 28%. First million out the door, leaving $9 million, then pro-rata distribution, so 20% of $9 million = $1.8 million, so $2.8 million total, or 28% of the exit. Return of capital is important--I think as an entrepreneur I am obligated to return capital, so I don't mind the downside preferences---a 1x cap makes sense to me. Of course a $20 m
Charlie Crystle writes about startups, startup ecosystems, tech, food systems, and random things.