![]() There’s a common mistake almost every entrepreneur makes… and if you approach venture capitalists like most entrepreneurs, you’ll NEVER get funded. See the right way to raise venture capital <– The “old-school” way of raising venture capital is DEAD!Īnd that’s why I created this page for you… to show you how to do it right. So make sure if an investor is offering you funding that you understand the type of stock they want to purchase and the specific rights (such as liquidation preference) that they seek, and negotiate accordingly. This is obviously a big, big difference to both the entrepreneur and the investor. If, on the other hand, they owned shares WITH this liquidation preference, they would then receive their ENTIRE $5,000,000 original investment back. at 1/3 of its original post-money valuation), then if the investor owned common shares (or preferred shares without the liquidation preference), then they would receive back $1,666,666 of their original $5,000,000 investment. If, then the company were to be sold for $5,000,000 (i.e. Let’s say an investor buys 1,000,000 shares of stock in a company at $5/share and the company’s total shares outstanding is 3,000,000 shares (implying a pre-money valuation of $10 million (2 million shares $5/share) and a post-money valuation of $15,000,000 (3 million shares $5/share)). This is an extremely valuable preference that can best be shown by example. liquidate their shares) before any distribution of proceeds in the event of a sale of a company. The liquidation preference means what it sounds – namely that preferred stockholders with this right get all of their money back (i.e. One very popular “preferred right” or “preference” that adds very significant value to outside investors and is common in venture capital investments is a liquidation preference. The answer depends on how and what rights are defined in the preferred stock. The question is whether they need to issue common or preferred stock. I get the same question a lot from entrepreneurs raising equity capital (venture capital or angel funding). It must be organized in such a way as to be able to get along under a leadership composed of average human beings.” “No institution can possibly survive if it needs geniuses or supermen to manage it.
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