πΒ Announcing the new FlowCog CanvasΒ π
The easiest finance tool you’ll ever use. Get it for free.
πΒ Announcing the new FlowCog CanvasΒ π
The easiest finance tool you’ll ever use. Get it for free.
Adam Tzagournis, CPA Β· 2 min read
We recently released a free tool to help startup founders understand liquidation preference, participating preferred stock, and non-participating preferred stock. These are terms you must know if you take on outside capital – they dictate how much money you make if you sell your company.
Liquidation preference sets a minimum amount of money to be returned to an investor in the case of an acquisition. It protects their downside risk when investing in your startup, and is typically equal to the amount they invested in you (see more below).
Non-participating preferred stock means that, if the startup gets acquired the investor gets to choose between the greater of either:
Participating preferred stock takes investor protections a step further (too far in my opinion). It’s when the investor, at exit, gets both their initial investment and their % ownership of the remaining proceeds. They’re double-dipping.
Let’s say you take investment from LMKHICBH Capital, my favorite fictional VC firm.Β They invest $20mm at a $20mm pre-money valuation (they’re sharks), so after the round they own 50% of the company.
If things go south and you sell your company for $20mm, they get their entire $20mm back and you get $0. You’re flying coach on that next vacation.
Don’t worry – we’re not done yet. Instead, let’s say you sell your company for a cool $50mm.Β Nice! Now you’re excited for that tropical vacation. π
Let’s take a closer look though.
LMKHICBH’s preferred stock is non-participating preferredΒ π
LMKHICBH’s preferred stock is participating preferred π΅
LMKHICBH’s preferred stock is participating preferred with 2x liquidation preference π€―
Ok, you’re still flying first-class in all these. But the outcomes vary wildly. Investor dollars are not all equal. Make sure you know what you’re signing up for, and what the liquidation preference stack looks like.
Oh yea, almost forgot:
LMKHICBH = let me know how I can helpful π
Not sure how to calculate liquidation preference for your startup? Use our free tool we built just for this purpose!
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