It's downside protection. It's basically saying they get paid before the founders but after loan holders. I'm simplifying, since multiple and/or participating liquidation preference does alter the math, but roughly speaking that's it.
On common stock though, I don't think that'll fly. There are a number of ways where founders with board control can screw a minority shareholder. For eg. they can issue 10x the current outstanding shares to their family, or appoint their friends to the board, or sell the company, or sell the company. It's only in extreme cases that VC's will expose themselves like that. I believe facebook's first institutional round was for common stock and no board seat.
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It's downside protection. It's basically saying they get paid before the founders but after loan holders. I'm simplifying, since multiple and/or participating liquidation preference does alter the math, but roughly speaking that's it.
On common stock though, I don't think that'll fly. There are a number of ways where founders with board control can screw a minority shareholder. For eg. they can issue 10x the current outstanding shares to their family, or appoint their friends to the board, or sell the company, or sell the company. It's only in extreme cases that VC's will expose themselves like that. I believe facebook's first institutional round was for common stock and no board seat.