Re:My company sold for $100M and I got zilch – how can that be?
by paulddraper on Friday October 25, 2019 @05:11PM
(#21359295)
My tl;dr:
There is preferred stock (full price; i.e. investors) and common stock (incentive plans; i.e. founders/employees).
A liquidation employs one of two methods to distribute payment, depending on which is better for preferred shareholders:
* Method 1. Preferred stock is converted into common stock (usually 1:1). All common stock receives payment.
* Method 2. Preferred stock first receives payment according to liquidation preference which a multiple of the initial purchase value. Then participating preferred stock is converted into common stock (usually 1:1). Finally, all common stock receives the remainder of payment, if any. During preference, carveouts may protect certainly common shareholders.
In good exits, method 1 is used. In bad or mediocre exits method 2 is used.
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Liquidation preference and participation are not required, but are tools to give founders more money per investor share.
Nowadays, you should be able to get a solid valuation for 1x liquidation preference, non-participating, no carveouts.
IMO this is a sensible compromise; if you can't even keep the initial investment value, you really haven't done well anyway.
There is preferred stock (full price; i.e. investors) and common stock (incentive plans; i.e. founders/employees).
A liquidation employs one of two methods to distribute payment, depending on which is better for preferred shareholders:
* Method 1. Preferred stock is converted into common stock (usually 1:1). All common stock receives payment.
* Method 2. Preferred stock first receives payment according to liquidation preference which a multiple of the initial purchase value. Then participating preferred stock is converted into common stock (usually 1:1). Finally, all common stock receives the remainder of payment, if any. During preference, carveouts may protect certainly common shareholders.
In good exits, method 1 is used. In bad or mediocre exits method 2 is used.
---
Liquidation preference and participation are not required, but are tools to give founders more money per investor share.
Nowadays, you should be able to get a solid valuation for 1x liquidation preference, non-participating, no carveouts.
IMO this is a sensible compromise; if you can't even keep the initial investment value, you really haven't done well anyway.