
Are IPOs the New Down Rounds? - prostoalex
http://techcrunch.com/2015/11/22/ipos-the-new-down-rounds/#.qjsmca:quUv
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ghshephard
How does a, presumably sophisticated, site like techcrunch write an article
like that without using the phrases, "liquidation preference", or "deal
structure?"

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hobbyjogger
Liquidation preferences are wiped out in an IPO. What's more relevant are
"ratchets" which were mentioned in the article.

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ghshephard
Is it always the case that liquidation preferences are wiped out in an IPO?
[http://www.vcdeallawyer.com/2010/02/15/understanding-
liquida...](http://www.vcdeallawyer.com/2010/02/15/understanding-liquidation-
preferences/) suggests otherwise.

 _The Series Preferred investors will have a priority in receiving
distributions from a liquidation, sale, merger, IPO or dissolution._

If it were the case that an IPO was treated differently than a sale, that
would suggest to me that preferred shareholders might be strongly at odds with
the common shareholders, when it came to decide whether to IPO or simply sell
the company.

This was a much better article,
[http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-
and...](http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and-unicorn-
valuations/) \- and it captures the use of ratchets - which seem to me a kind
of IPO liquidation preference.

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hobbyjogger
Yes, whoever VC deal lawyer is needs to work on more late stage deals. An IPO
is not a liquidation event - it's just another funding round. There are no
liquidation proceeds for the preference to apply to.

Here's Brad Feld[1]:

Jason once had an entertaining (and unenjoyable) debate during a guest lecture
he gave at his alma mater law school with a partner from a major Chicago law
firm (who was teaching a venture class that semester) that claimed an initial
public offering should be considered a liquidation event. His theory was that
an IPO was the same as a merger, that the company was going away, and thus the
investors should get their proceeds. Even if such a theory would be accepted
by an investment banker who would be willing to take the company public (no
chance in our opinion), it makes no sense as an IPO is simply another funding
event for the company, not a liquidation of the company. However, in most IPO
scenarios, the VCs “preferred stock” is converted to common stock as part of
the IPO, eliminating the issue around a liquidity event in the first place.

[1][http://www.feld.com/archives/2005/01/term-sheet-
liquidation-...](http://www.feld.com/archives/2005/01/term-sheet-liquidation-
preference.html)

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ghshephard
So - as a result, the VCs may be in conflict with management/common
shareholders when it comes to making a decision between selling the company
(and collecting their liquidation preference) versus an IPO (in which the VCs
lose all their seniority) - which is why the ratchet is in place, to protect
that preferential treatment?

~~~
hobbyjogger
In the vast majority of deals, collecting your liquidation preference is a
sort of soft landing - the VCs just get their money back (without interest).
It's much better for everyone if there's a big exit (either a high priced
acquisition or selling shares on NYSE after an IPO) in which case the VC will
convert to common and get 5x or 10x or what have you.

That's not to overlook the host of differing incentives between preferred and
common-which are numerous and often even intentional. Ratchets are closer to
antidilution than they are to liqpref.

