Liquidation Preferences: They do make sense

Good post by Ciaran O’Leary of Earlybird on how to manage liquidation preferences. Also worth following the links.

I remember how long it took me and my colleagues to get to grips with this issue when we did our first VC round. For the first-time entrepreneur it felt unfair and lopsided.

But then you realize that this is in fact needed to prevent lopsided outcomes of another sort: Where the founders and angels sell the company quickly after the investment and possibly for cheap and they make money and the VC investor doesn’t.

So the liquidation preference helps reset the stage and make everybody want to grow the valuation from here on forward.

Of course there are alternatives, specifically granting veto rights to the new investor on exit price etc., but those are likely going to be set at the wrong thresholds and then lead to awkward and hurried behind-the-scenes haggling in case of an impending exit. Which you don’t want.

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