Liquidation Preferences and Participating Preferred Stock: How VC Terms Affect Deals

[@financialmodeling]

Files & Resources: youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/Startups-VC/Liquidation-Preferences-Participating-Preferred-Slides.pdf youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/Startups-VC/Liquidation-Preferences-Participating-Preferred.xlsx

[@brucehan6454]

Brian why don’t you start ur own elite boutique bank. Man you educated the whole Wall Street.,l..

[@financialmodeling]

Thanks, but no real interest. I like setting my own hours and not having to answer to clients 24/7, so IB is not a great fit for me.

[@projekts5047]

thanks for still being active. love ur vids!

[@financialmodeling]

Thanks for watching!

[@clayrowland7760]

Could you do an example with multiple share classes that have Non-participating liquidation preferences and Pari-pasu seniority structure? I'm struggling with the mechanics of each class recieving their preference equally, but at the same time because share classes have different conversion threshold, one might take their preference and the other might not, which changes the ownership for the exit.

[@financialmodeling]

We don't have any examples like that currently, but I will see if we can cover it in the future. In general, though, with pari passu seniority, the normal assumption is that all investors either convert or do not convert. It gets very complicated / is arguably an unsolvable equation if you do not make that assumption because you'll get into cases where one conversion decision affects the total amount of proceeds available to everyone else.

[@Chris-eo1qp]

It seems like, in the Just Liquidation Preferences section, we're modeling the Series A Investors as 25% owners in a pool of $100M of equity value. Wouldn't we instead want to model the Series A Investors as 33.3% owners in a pool of $60M of equity value, given that Series B does not convert to common and Series A does?

[@financialmodeling]

You're correct that if the Series B investors take their liquidation preference, as they do here, the Series A ownership should be based on the remaining $60M and the percentage they own of that (~33% since the remaining investors are 25% Series A and 50% common, and 25% / 75% = ~33%). This tutorial was based on an early version of a few VC lessons , and this specific issue was fixed later (you can check for this case by adding another condition in the formula or setting up separate columns for different scenarios). We're going to delete and re-do this video and split it into shorter segments that better illustrate these concepts. As it doesn't reflect our current VC course and coverage from the past year.

[@mohammedromanshaikh8025]

Hi Sir, Interested in Your channel, keep posting Quality Content, Happy if U Create Financial Models and Valuation of any Good Renewable energy Co. From Scratch 😊 Thanks

[@financialmodeling]

Thanks. We don't cover renewable energy currently except for a few examples that are part of longer case studies in our courses.

[@mohammedromanshaikh8025]

@@financialmodeling No problem, Can u do Full Multiple Valuations Model, by taking Good Co. From Scratch & I like most of the Videos where u have build from From Scratch, Thanks for the Valuable Content, Subscribed👍

[@saifulisfree]

Just trying to generalize the steps for the waterfall. My takeaway is: If there were multiple rounds of financing all with liquidation preferences with a mix of rounds that were stacked while others were pari passu and within those rounds some investors were stacked and some pari passu. the liquidation preferences of all investors in order of seniority would be distributed first before moving on to the second tranche: the participating preferred distributions. The final tranche just being common equity distributions and those that also converted to common. Is this correct?

[@financialmodeling]

Yes.

[@saifulisfree]

how do you calculate conversion threshold for a series B? At the 25:00 mark? Is it the $40M/25% or the cap $80M/25% ?

[@financialmodeling]

It's the $40 million / 25% for the conversion threshold. But at 25:00 here, we appear to be doing something else related to the equity proceeds for the Series B investors.

[@ajm1840]

Hi Brian, you are a legend. Quick question, if I was to reformat it and add a Series C, when doing the 'Series B Investors post money ownership' and 'Series A Investors post money ownership' can I still use the numbers from the Series B calculations or does this need be recalculated again?

[@financialmodeling]

Thanks. I'm not sure why you would need to recalculate anything (??). The Series A and B rounds still took place. It's just that with the new Series C investors in place, the Series A and B investors will now be diluted and own less, unless they decide to invest more to stay at the same percentage ownership.

[@alexanderoganisyan639]

Thank you for the video! Can you explain please at 27:01 mark, why when we have both participating preferred and convert to common options included, investor B only gets 62,5 mln instead of min ((62,5+40;80))? I thought when we have participating preferred option investor B should get both his liquidation preference proceeds and proceeds from conversion to common with the restraint of participation cap - so in the example above investor B should get 80 mln, and not the 62,5 as in the video Correct me if I'm wrong please

[@financialmodeling]

If you look at the final output here, the Series B Investors still get $80 million at the end. It's just that in this *intermediate step* we're saying that if the Series B investors convert to 100% common shares, giving up their liquidation preference and the participation cap, they'll earn the $62.5 million. But they will only convert to common if it results in a better outcome. It does not produce a better outcome here, so they stay in preferred, earn the liquidation preference, and then earn a percentage of the common proceeds up to the $80 million cap.

[@kaikuiwang8975]

this is really great content!

[@financialmodeling]

Thanks for watching!

[@saifulisfree]

Also wouldn’t it be more efficient to set up the formulas based off the conversion threshold so you don’t have to flip between ones and zeros on the last column. Cause you know right away if it should be 1 or 0.

[@financialmodeling]

Yes, but the issue is that sometimes in more complex models, the correct conversion decision is not always clear from the start because each investor group's decision will affect the others (and this came from a more complicated model). But you could simplify this specific version.

[@mohamedzitan9321]

Hello, could we by any chance have your excel file ? Thank you for this video with tons of information !

[@financialmodeling]

Click "more" and scroll to the bottom.

[@alikhalil9728]

Thanks man!

[@financialmodeling]

Thanks for watching!

[@victorfiguerola7928]

How can we get this template?

[@financialmodeling]

Click "More" under the description and scroll down and click the links.

[@saifulisfree]

Do you have a VC course?

[@financialmodeling]

We cover VC-related topics in Module 14 of the Financial Modeling Mastery course. It's not different enough to justify a whole separate course, as you use similar skills when analyzing startups and growth companies.