The plural of anecdote is not data.<p>How many companies with exits with liquidation preferences didn't make the VCs money? How many without preferences didn't make the VCs money? How many involved the founders getting screwed because of these preferences?<p>I don't object to the preference in general, but any multiplier greater than 1.0 is a red flag for me.<p>You can find VCs that will do 1x preferences. I don't know what the options are for deals without preferences.
<i>And investing in common stock when the founder controls the company and the exit is not a fair deal.</i><p>Don't tell that to any employees of your portfolio companies.
I am an entrepreneur myself and I think an 1x liquidation preference makes sense. You cannot get X dollars at a 3X valuation and then turn around and sell the company for X keeping 2/3 of X and only giving 1/3 of X to the investor.<p>I think what most people disagree with are the 2x and 3x liquidation preference terms that are not uncommon in term sheets. They are a very effective way, for the investors, to push the founders to a more risky / bigger potential path so that they can also make money. This works well in the context of the VC model (for the VCs).
The tough part about being a first time entrepreneur is stock preferences and setting them up properly. You want to find a way that the future employees won't get screwed, but you also want to ensure that your company is an attractive investment opportunity for possible angels/vcs. From what I understand there's not really a good balance to keeping things equal unless one group gets shafted.<p>Does anyone have any examples of how to setup the stock situation to benefit both employees and investors?