The most common argument for VC 1x liquidation preference is to avoid the situation where the VC looses while the founder gets rich. Say the VC puts in 5M, gets 20% equity. The founder sells for 5M, gets 4M, big success for the founder, total failure for the VC.
Now the counter argument would be that whether its a 0x or a 1x it's a loss for the VC, as they're in the game of getting a 100x. And the founder's 'win' is only a win relative to the general population, they also lost as they could have made so much more if things went right.
So 1x liquidation is mostly to prevent a founder from trying to game the system. But I can totally see how it could feel unfair if there wasn't any ill behavior founder-side.
The issue of employee stock [options] vs founder stock is a somewhat separate issue.
Exactly this. Say I raise 1m of VC money for 20% of my company. I could sell the company tomorrow for 1m (as I own 80% and have majority voting rights), and get to keep 800k without doing anything. The VC would lose 80% of their investment in a single day.
It would seem like a 0x liquidation preference would provide protection in this scenario. i.e. VC is guaranteed to get his original investment back, but not a multiple of it.
"Say the VC puts in 5M, gets 20% equity. The founder sells for 5M"
This is exactly what 1x non-participating liquidation preference is. The 1x is 1x of the invested amount, not a profit multiplier.
https://vcexperts.com/buzz_articles/185
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The most common argument for VC 1x liquidation preference is to avoid the situation where the VC looses while the founder gets rich. Say the VC puts in 5M, gets 20% equity. The founder sells for 5M, gets 4M, big success for the founder, total failure for the VC.
Now the counter argument would be that whether its a 0x or a 1x it's a loss for the VC, as they're in the game of getting a 100x. And the founder's 'win' is only a win relative to the general population, they also lost as they could have made so much more if things went right.
So 1x liquidation is mostly to prevent a founder from trying to game the system. But I can totally see how it could feel unfair if there wasn't any ill behavior founder-side.
The issue of employee stock [options] vs founder stock is a somewhat separate issue.
Exactly this. Say I raise 1m of VC money for 20% of my company. I could sell the company tomorrow for 1m (as I own 80% and have majority voting rights), and get to keep 800k without doing anything. The VC would lose 80% of their investment in a single day.
Thanks.
It would seem like a 0x liquidation preference would provide protection in this scenario. i.e. VC is guaranteed to get his original investment back, but not a multiple of it.
"Say the VC puts in 5M, gets 20% equity. The founder sells for 5M"
VC could just get the 5M back in this case.
This is exactly what 1x non-participating liquidation preference is. The 1x is 1x of the invested amount, not a profit multiplier. https://vcexperts.com/buzz_articles/185