It seems commonly accepted that all VC investment comes with (at least) a 1x liquidation preference. Is there logic as to why this is commonly accepted and prevalent?
Liquidation preference in effect makes VC investment a hybrid between standard equity investment and a loan (it has an almost-guaranteed repayment feature, like a loan, but trades interest for potential upside.) Its better for the other stockholders (and for the success of the company) than VCs holding debt instruments, and its better for the VCs than common stock.
On the surface, it seems wrong that employees get "worse" equity, i.e. common equity, than the investors and founders.
As long as the features of the type of equity they are receiving are taking into account when employees decide to accept an equity + salary compensation offer, I don't see the problem. Liquidation preference is a guarantee against losing money. The employees' guarantee against losing value for the time invested is the salary + benefits part of the salary + benefits + equity pay deal.
That's an interesting way of framing it. A 1x liquidation preference is like buying a loan at 0.50 on the dollar.
A 0x liquidation preference (insurance that you'll get your original investment back) would be more "bond-like" to me.
Good point that the employee can similarly adjust his/her price on the compensation offer. Unfortunately, I think a lot of employees in SV dont understand the dynamics at hand here.
If you are an early employee, it's also not possible to know if the company will accept a 2x liquidation pref investor in the future.
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Liquidation preference in effect makes VC investment a hybrid between standard equity investment and a loan (it has an almost-guaranteed repayment feature, like a loan, but trades interest for potential upside.) Its better for the other stockholders (and for the success of the company) than VCs holding debt instruments, and its better for the VCs than common stock.
As long as the features of the type of equity they are receiving are taking into account when employees decide to accept an equity + salary compensation offer, I don't see the problem. Liquidation preference is a guarantee against losing money. The employees' guarantee against losing value for the time invested is the salary + benefits part of the salary + benefits + equity pay deal.
That's an interesting way of framing it. A 1x liquidation preference is like buying a loan at 0.50 on the dollar.
A 0x liquidation preference (insurance that you'll get your original investment back) would be more "bond-like" to me.
Good point that the employee can similarly adjust his/her price on the compensation offer. Unfortunately, I think a lot of employees in SV dont understand the dynamics at hand here.
If you are an early employee, it's also not possible to know if the company will accept a 2x liquidation pref investor in the future.