1. To who? There is a liquidity problem here. No one would buy a company at par value that just had the founders bail - and no founders are going to bail on a company that is killing it. This is such an outlier case that it's ridiculous to assume its a primary motivator.
2. Simple, give employees vesting equity grants like the founders, not options.
3. Downside protection is anti-pattern for VC. High risk = high reward. You might get more investments, but those are inflated and skews the market toward making riskier investments if they know they have a fall back. Secret is a perfect example.
The reality is LPs are in there because that's been standard and companies who need investment would rather take the money with shitty preferences than not take it at all.
If you don't want to do investments with LP, then either be so good that people want to invest on any terms you offer or don't take VC.
2. Founders do get options. They just get them with a very low strike price because when they start the company it's worthless (essentially).
3. Secret didn't fail because it raised money at too high a valuation. It failed because it didn't achieve real product market fit. If it had achieved fit then the excellent terms on which they raised money would have been very good for them.
To your point about "invest on any terms you offer" what I'm trying to show you here is that having investors buy preferred shares is good for everyone involved.
> " Immediately after taking the investment founders could sell the company for the value of the cash and profit handsomely while the investor loses the bulk of their money."
That's nonsensical on the face of it. If the company is worth $10M and an investor puts in $2M for %20, then the remaining equity is $8M. I don't consider selling a $10M asset for $2M (and netting %80, or $1.6M) to be "profit[ing] handsomely". It's giving up %84 of the company.
Plus it's trivial to prevent this by requiring, as part of the deal terms, that a sale of the company have investor approval.
Your second point presumes that there's only one class of stock. There can be preferences, such as the anti-sale clause I mentioned that common shareholders don't have. That's completely different from liquidation preferences.
Your third point is silly, I'm focusing on being denied a fair deal in a liquidity even and you're talking about "Donswide protection". It is true that treating people fairly works better on the downside too.
But your comment "what are you starting a company for in the first place?" makes me think you're naive and reacting as if I've dared to disagree with the common wisdom of our lords and saviors the VCs.
I've been starting companies for 30 years, this is experience talking, kid.
2) If you have different classes of stock that pay out the same in a liquidation event you aren't going to be able to get a significant difference in their value.
3) Who's to say what's fair? We're talking about capitalism not an ethics textbook. Fair is whatever you can negotiate. And providing downside protection to the people putting in the cash enables you to enhance your upside reward. If you're raising 2M on 8M pre and you're more concerned about what happens if the company liquidates at 5M than what happens if you get to 50M or 100M then I do honestly wonder why you're starting a company in the first place.
1) Immediately after taking the investment founders could sell the company for the value of the cash and profit handsomely while the investor loses the bulk of their money. That's clearly no good.
2) If VCs are buying common then it will push up the value of common stock much faster leading to much much higher strike prices for employees. That's clearly bad for them.
3) By ensuring downside protection VCs are willing to invest at higher valuations leading to less dilution which increases the upside reward if the company is successful. If you're focusing on downside protection instead of upside reward as a founder then what are you starting a company for in the first place?