Good question Puneet! Before I answer, let's just do a quick recap of the cap table: C: 20% (2x liq pref, invested $10M at $50M valuation) B: 25% (1x liq pref, invested $5M at $20M valuation) A: 20% (1x liq pref, invested $2M at $10M valuation) Founders: 25% ESOPs: 10% The last round was raised at a valuation of $50M. Case 1: Sells for $25M Since liq pref stacks up with seniority, in this case, Investor C will get a 2x return before A, B or the founders get anything. So: C: $20M B: $5M A, founders, employees: $0 Case 2: Sells for $50M Again, remember the stacking order. This time: C: $20M B: $12.5M (25% of $50M) A: $10M (20% of $50M) Founders, employees: $7.5M
Hi, Had a doubt- Does a higher liquidation preference mean a higher position in the stacking order. For instance, in the example given of A, B & C investors, C is given a higher position in stacking order because C had a 2x liq pref. Is that a rule based order, or does this order also becomes negotiable?
Would like to know about priced rounds and non priced rounds. The videos you've been making are really helpful not just for founders but for people like me who've just started their journey in the PE/VC space.
Sir liquidation preferrences take place when there is the down round winding up or acquisition of company or at any winding up or acquisition of company ????
True that double dip (called participation rights) is just draconian. But know that if the company grows sufficiently and enough deep pocket investors come in, these participation granted at an early stage, can get cleaned out - legally it’s a quick process but the challenge is commercially negotiating it - so if you realise there’s a double dip in your transaction documents, don’t panic. It’s fixable.
Aweosme video. The company that I work for recently got acquired for less money than they had raised. And that is when I came to know this sort of thing exists. Even then, it's only after watching this video that I understand how much complicated this is. Can you explain more about how the money left after paying off investors gets split between esops and founders. Things for employees to check for in ESOP grants?
Thanks Mathew and sorry to hear about the outcome at your last gig. In your case where they sold for what they raised in total - even the founders would make nothing from the exit. How it gets split is actually in the fine print - and hard to cover in this comment. A lot of it comes down to the founder's intentions and what stance they take in the exit negotiations. I will definitely do a video on ESOPs soon!
can there be any option to exit first investor handsomely when second investor is getting onboarded and the stake giving to investors remains the same like say 20-25%
Super informative, question - what happens when the company sells for 25mn and 50mn ? Please answer in comments for founders and A, B and C investors
Good question Puneet!
Before I answer, let's just do a quick recap of the cap table:
C: 20% (2x liq pref, invested $10M at $50M valuation)
B: 25% (1x liq pref, invested $5M at $20M valuation)
A: 20% (1x liq pref, invested $2M at $10M valuation)
Founders: 25%
ESOPs: 10%
The last round was raised at a valuation of $50M.
Case 1: Sells for $25M
Since liq pref stacks up with seniority, in this case, Investor C will get a 2x return before A, B or the founders get anything. So:
C: $20M
B: $5M
A, founders, employees: $0
Case 2: Sells for $50M
Again, remember the stacking order. This time:
C: $20M
B: $12.5M (25% of $50M)
A: $10M (20% of $50M)
Founders, employees: $7.5M
This is very help and crisp. Thanks for this no nonsense approach.
Very Informative and crystal clear. Thank you Kushal!
Great stuff Kushal, thanks for putting this video series together
Extremely Content. Would be highly obliged seeing these more and more..!
Excellent explanation... Thank you
Thank you Sir for sharing with us, an excellent video with important information
Awesome and raw content kushal. Thanks for sharing
Thànk you Kushal.
It was very helpful
Awesome stuff, Kushal!
Thank you for doing this. This is super informative!
Best training ever
Hi, Had a doubt- Does a higher liquidation preference mean a higher position in the stacking order. For instance, in the example given of A, B & C investors, C is given a higher position in stacking order because C had a 2x liq pref. Is that a rule based order, or does this order also becomes negotiable?
Would like to know about priced rounds and non priced rounds.
The videos you've been making are really helpful not just for founders but for people like me who've just started their journey in the PE/VC space.
Thanks Yosidh! We will cover priced and unpriced rounds soon!
Sir liquidation preferrences take place when there is the down round winding up or acquisition of company or at any winding up or acquisition of company ????
Interesting video... Curious to know how the liq pref of earlier series investors affect the investment mindset of subsquent investors?
Later investors usually take at least the same liq pref as the last round's investors!
Do existing investors look to revise their liq pref to a higher rate while negotiating on exercising pro rata in subsequent rounds?
Lmao I work in private equity and this guy explains better than anyone else
True that double dip (called participation rights) is just draconian. But know that if the company grows sufficiently and enough deep pocket investors come in, these participation granted at an early stage, can get cleaned out - legally it’s a quick process but the challenge is commercially negotiating it - so if you realise there’s a double dip in your transaction documents, don’t panic. It’s fixable.
Nice. I really like #4 :D
Aweosme video. The company that I work for recently got acquired for less money than they had raised. And that is when I came to know this sort of thing exists. Even then, it's only after watching this video that I understand how much complicated this is.
Can you explain more about how the money left after paying off investors gets split between esops and founders. Things for employees to check for in ESOP grants?
Thanks Mathew and sorry to hear about the outcome at your last gig.
In your case where they sold for what they raised in total - even the founders would make nothing from the exit.
How it gets split is actually in the fine print - and hard to cover in this comment. A lot of it comes down to the founder's intentions and what stance they take in the exit negotiations. I will definitely do a video on ESOPs soon!
@@firstcheque7252 thank you for the reply. Yes, in this case founders also got nothing.
Looking forward to the video on ESOPs
Brilliant
can there be any option to exit first investor handsomely when second investor is getting onboarded and the stake giving to investors remains the same like say 20-25%
Yes but it happens rarely. If Company is doing well, there is no reason the earlier investor will sell!