
Ask the Wizard: Venture Terms - Liquidation Preferences and Participation - brett
http://www.burningdoor.com/askthewizard/2007/04/venture_terms_liquidation_pref.html
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dcostolo
Brett, I've seen participation and preference multiples in term sheets from
Tier 1 investors. It all depends on the deal, the stage, and the environment.
It's definitely not a bad sign for an entrepreneur, it's just all dependent on
what kind of market you're in and what the demand for the deal is from other
investors. Having said this, participation was classicly an "east coast" deal
term so you'd probably still expect to see it more from new york/boston
investors than from west coast investors. I think that's still accurate.

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brett
There seems to be agreement that better investors are much less likely to ask
terms like fully participating preferred or a 5x preference multiple which are
more onerous for founders. At what point then do you worry less about the
terms you are getting and more about the investors you are getting such terms
from?

Along the same lines, if you're having to scrape the bottom of the barrel for
VCs, should you take that as a powerful sign that YOU are doing something
wrong? Are there examples of good teams with good ideas that just had to take
crappy terms from crap investors and lived through it to succeed?

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brett
Definitely heard about this before, but it was good to see examples. Also one
thing that was glazed over at startup school (and at the other ones I listened
to) is that it is an exclusive or sort of thing because these terms are
specifically for a "subpar exit". Preference and participation OR conversion
to common stock. Now it seems obvious, but before I was kind of thinking,
"participate percentage-wise? don't they get to do that already because they
have stock?"

