In my discussions and negotiations with Pre-Seed / Seed stage start-ups I get strong push from founders not to have liquidation preference right. In my opinion it is a must to have right for any start-up investor.
Because as an investor, I’d at least want to get my money back before the founders share the remaining proceeds. An example explaining a one time non participation liquidation preference:
Startup A receives an investment of EUR 100,000 from VC1 at a post-money valuation of EUR 1,000,000. VC1 owns 10%. Time pass, no new investment is received, 5 years in the founders receive an offer to sell 100% of the company for EUR 800,000. Founders are tired of running the business, they believe this is a good opportunity and agree to sell. If there would be no liquidation preference, the investor would get only EUR 80,000 (800,000 x 10%). It means that VC1 has lost EUR 20,000 while the founders have netted EUR 720,000 returns to their bank accounts. With a one time non-participating liquidation preference, the distribution would be as follows – VC1 gets its money back, the full EUR 100,000, while the remaining EUR 700,000 are distributed proportionately to the founder equity holdings. VC1 is no longer participating in the further distribution.
However, if you have a one-time participating liquidation preference, this would mean that the VC1 shall participate proportionately in further distribution the EUR 700,000. Which end result in VC1 receiving EUR 100,000 and then also EUR 70,000 (700,000 x 10%).
The image attached illustrates different variation of distribution based on different types of liquidation preferences.
Marie MarksStartup Founder & VC Enthusiast // Obsessed with Deep ConversationsSome time ago
Dear Reader, I just wanted to start a little publication. A quick blog on this platform to express my day to day as a founder. You wouldn't believe that reality of what is found behind a business idea, the amount of challenges, the mind-blowing anxiety and the hard work that is required every day to ensure the development of projects.
In about three weeks time, I'm launching my company. BRIDL.
It's a marketplace for the trade of Sports Horses, which is allowing me to bring together my passion for horses and my love for entrepreneurship.
This year, 2020. Has been very challenging. I spent the summer breaking all the rules of the lean startup trying to raise funding for a project where I was alone without a product. I spent a crazy amount of time running after what could be specifically the labels we like to stick to the entrepreneurship lifestyle to realise sooner than expected that I was completely wasting my time.
You see, starting a company is not easy. Especially at my age. I'm 22, since last week and really only the fact of knowing there are taxes to pay at some point freaks me the hell out. Everything is a crazy process: sketching your idea, bringing your thoughts together, building a team, effectively choosing your co-founder, incorporating your business or even just figuring out what the branding of your project will be..
So many layers come together in the launch of a project. In two weeks, exactly on the day of the launch will be a year since I started sitting down to work on BRIDL. It's been a year of my life where I somedays cried, some others felt excited while asking myself constantly if I was doing the right thing. Building a company is one of the hardest but one of the most fulfilling growth experience that one can go through.
I have a tremendous amount of things to learn. Many mistakes to make and much more experience to acquire however there is one thing that I can tell you: even when everyone tells you it's impossible, when everyone tells you that it's not worth it and that you just keep it safe: listen to your gut, try, fail, keep going. If it's your dream, make it happen.
Why paddle from Vilnius to Nida?
It took 6 nights to get from Capital of Lithuania to one of the most beautiful parts of Lithuania - Nida.
Two good buddies are sitting in a party and discussing best trips of all time. Suddenly one of them offers to go kayaking. They both hype up and decide that half a year from now, they will go kayaking. But where? Of course they are too ambitious to go swim in boring lakes. They decide that paddling to Nida would be an awesome idea.
Week before the trip:
“Haha, are we seriously going to the trip?”
“Of course! No more questions.”
That’s it. Thats the only single conversation before starting to pack all the gear and making sure all of the documents are checked.
Most painful experience:
Well. It rained a lot one day. I mean hell of a lot. All of the clothes were soaked, the sleeping bag contained two glasses of cold water which even made it better.:)
We had to sleep in soaked hammocks, obviously, it’s not the best idea. From 6 hours of sleep I only remember sleeping 30 minutes. That’s it. It was such a terrifying experience, I swear I thought, that I might get hypothermia. However, we survived the night and continued our journey.
Well, hearing about the horrible night you might think that I became grateful for my warm sheets back in Vilnius. Yes, for a fact, I did, but surely that wasn’t the best lesson. While having to sit in the same kayak for a week with my friend, I spent a lot of time thinking and dreaming, which lead me to this conclusion - SOMETIMES you need to shut-up and be quiet. For real. Don’t bother talking and just enjoy the silence. That’s what i still regularly do in Vilnius - between work and sleep I spend some time in quiet. Just thinking and dreaming.
However, we all learn different things, so if you want to hear more about my trips - hit me up! Would love to share more stories❤️