Live from Silicon Valley: : How to Build a Unicorn From Scratch–and Walk Away with Nothing: “Liquidation preferences, participation, ratchets…
…even the very term preferred shares (they are called ‘preferred’ for a reason) are things every entrepreneur needs to understand. Most terms are there because venture capitalists have created them, and they have created them because over time they have learned that terms are valuable ways to recover capital in downside outcomes and improve their share of the returns in moderate outcomes–which more than half the deals they do in normal markets will turn out to be. There is nothing inherently evil… standard procedure for high risk investing. But for you the entrepreneur to be surprised after the fact about what the terms entitle the venture firm to is just bad business–on your part. For any private company with different classes of stock, the capitalization table is not-at-all the full picture of who gets what in an outcome…