Here is a good article by Scott Austin at WSJ Online on a subject we brought up last week.
“Start-up companies appear to be giving into investor demands of a harsher funding deal term that gained notoriety after the tech bubble burst in the early part of the decade.
According to two separate quarterly reports issued last week from law firms Fenwick & West and Cooley Godward Kronish, venture capital firms are more frequently receiving multiple liquidation preferences that protect them from losing out on investments.
Venture capital firms almost always receive preferred stock when they invest in companies, giving them certain rights over common stock holders, usually the founders and executives. One of these standard rights is a liquidation preference, which gives preferred stock holders the right to get their money back from a company before other common stock holders in an unfavorable sale or liquidation.
But with more companies in trouble, investors are inserting multiple liquidation preferences into term sheets, meaning they could get two times or more the amount of capital they invested. That can create nightmarish capital structures for companies but give them more incentive for them to become successful.”
Read the full article here.
Blog of Intellectual Capital 