Perspective, Pontification and Propoganda about Entrepreneurship and Venture Capital, brought to you by David Hornik of August Capital.

« Disintermediating CBS | Main | Walled Gardens At DemoMobile »

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341d157b53ef013480ce1726970c

Listed below are links to weblogs that reference What's Left To Say About Participating Preferred Stock?:

» Tips for the Software CEO from Thinking Out Loud: Thought Leadership from an Enterprise Architect
Prior to becoming an enterprise architect, I worked in various capacities for several Internet startups. On an almost daily basis, I have the opportunity to chat with sales people from various small software companies attempting to sell their wares wit... [Read More]

» Tips for the Software CEO from Thinking Out Loud: Thought Leadership from an Enterprise Architect
Prior to becoming an enterprise architect, I worked in various capacities for several Internet startups. On an almost daily basis, I have the opportunity to chat with sales people from various small software companies attempting to sell their wares wit... [Read More]

» Venture capital from biriblog
Back in early 2003, Oliver Curme of Battery Ventures wrote an insightful and near-prescient thought piece on the future of venture capital and investing in IT. It was quite well thought out and made some astute observations...his argument basically went [Read More]

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Jason Lemkin

Participating Preferred I think is somewhat like leasing a car. There's nothing wrong with leasing a car and it has some benefits but leasing can really be a bad deal for the ignorant. Participating preferred allows VCs to give founders a valuation that appears higher than it in fact is - kind of like the low monthly payment on a car lease vs. a purchase. Like leasing, it can leave a bitter taste in your mouth at the end of the deal; in one case, a merger/sale where the investors take home a lot more per share that the founders, the other where large fees and per mile charges upset the lessee when he turns in the car. But if you are sophisticated, participating preferred can be a way for founders and VCs to split the difference on an issue of how fast / how successful a company will be. If the founders sell for a higher price than the preferences clear at (assuming there is a cap) then perhaps they got a slightly better valuation that otherwise. But in my experience, like leasing a car, most people and most times people will come out better sticking to the straight and simple deal.

Paul Lisiak

I agree that the effect of the "participation" is not readily understood by many entrepreneurs. More to your point (and great analogy on the car leasing model), it is definitely not something many quality mid-level job seekers would be sophisticated enough to factor into the expected value calculation of their stock option grant. In my experience on the East Coast, many non-CxO level employees do not even understand the concept of preference.

Participation is simply a "trick of the trade" and is a moving part in a complex negotiation. I do not agree that it is necessarily all bad for companies as it allows VCs to give (if used as intended) more upside potential in the form of a higher pre-money. That said, it should send a signal to an entrepreneur that the VC is "hedging" the downside risk of the investment and is not swinging for the fences on the deal.

I recently received a participation term in trade for a higher valuation under a recap situation. I accepted it as the chance for a big win was far outweighed by the prospect of small win/asset sale. The higher valuation also helped to not completely wash out the existing common that contained my (recently converted) old preferred shares.

Any thoughts on a senior management carve-out pools? This "trick" lessens the effect of participation as it pays certain (decision making) members of the team a fixed percentage of an acquisition pari passu with the participating preferred. I believe the deal is somewhat backhanded to the other employees (who are made even more subordinate), but is sometimes necessary to get critical persons on board with the deal. I guess no deal will ever be completely fair to everyone....

(As a side note, I strongly believe CEOs should generally do a better job explaining all aspects of a VC deal to their employees in order for the economics to be more transparent.)

Stock Market

When it comes to investing, many first time investors want to jump right in with both feet. Unfortunately, very few of those investors are successful. Investing in anything requires some degree of skill. It is important to remember that few investments are a sure thing – there is the risk of losing your money!

DEKARONデカロン-RMT

rmt ドラゴンネストDefining the site's cost isn't a simple task.We comprehensively evaluate site SEO, website traffic 大航海時代-RMT(quantity, source, geography) and make approximate conclusions about the website's cost.Special attention is paid not only to the current site's cost but to the growth rmt アラド(or decline) dynamic of this or that resource.RMTメイプルストーリー RMT

DEKARONデカロン-RMT

DEKARONデカロン-RMT of a site.rmt ff11 The cost of a site would be how much it costs to run it. The worth of a site is determined mainly by how much revenue the site is bringing in.信長の野望Online RMT Other factors would include how much traffic the site is bringing in on a monthly basis, email subscribers if any,アラド戦記 rmt rmt ドラゴンネスト メイプルストーリー RMT アラド戦記 rmt rmt アラド rmt ff11 信長の野望Online RMT 大航海時代-RMT DEKARONデカロン-RMT

Coach Luggage Bags

All right, well, we got your body lotion, your InStyle Magazine, your jewelry box.
We're not-- Where's my Bat Signal?


Coach Bags Clearance

We shall defend ourselves to the last breath of man and beast.

Herve Leger Dress

It is actually truly beneficial to read your net. The information amongst your weblog is strictly superb, and your blog system is Basic type, It isn't dazzied. So superb.

oilseed press

Hey there! I've been reading your website for a while now and finally got the bravery to go ahead and give you a shout out from Atascocita Texas! Just wanted to mention keep up the fantastic work!

wood pellets

Are you willing to get resume, that conform the field of science you expect ?. You can rely on our resume writers, as you count on yourself. Thanks because it’s the useful fact

cheap jordan 11

Thanks for sharing. This website is to I too have to help. Very good.

Air Jordan Shoes

Wise man have their mouths in their hearts, fools have their hearts in their mouths.

The comments to this entry are closed.