Thu, Jan 03, 2013

A Tale of Liquidation Preferences

In case you are raising money, have raised money or are thinking about raising money — here’s a true story. Learn from it.

When I raised venture capital for my first startup the VC firm negotiated a 2.5x liquidation preference into the contract. Which didn’t seem to be a huge problem as we had all intentions to exit big.

Well, life can be a bitch. And in my case that bitch made me sell the company for a price which returned money to my investors (thanks to their liquidation preference) but none to me. Zero. Zilch. Three years of my life, $150k of my own money and money I raised from friends and family. Nothing.

I didn’t even wanted to sell. We had money in the bank. We could have tried to do something different, ride out the storm (we sold the company right when the dot com bust was starting to go apeshit). But at that time I lost majority control over the company I founded.

Lessons learned: 1) Avoid liquidation preferences. VCs are not banks, thus they should not behave like one. And probably more important — 2) Treat equity like Gollum’s One Ring. It’s all you have and once you’re below 50% life gets suddenly much more complicated.

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