What about preference with a capped participation?
The way capped preferences work is that in a sale of the business, the VC investor gets its investment back (a so-called 1x preference) and then participates with the common in any proceeds from the sale that exceed the preference. Imagine the fairly frequent case of a 2x or 3x capped participation. This means that the VC gets to participate until her return is 2x or 3x, as the case may be, their investment. (If the VC would get more by converting, they will simply convert.) This kind of structure helps the VC in low to intermediate return scenarios. They...
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Terms in Down Times
In a recent board meeting for a client, one VC director described the current investment climate as follows: "flat is the new up 50%." Assuming he is right, and I think he probably is, several things follow. Some of them are obvious. Valuations are down; it is harder to get money than it was just a few months ago etc. However, here is another prediction (perhaps it is obvious as well). Certain deal terms that we have not seen since 2001 will start cropping up like mushrooms after rain. Look out for full-ratchet antidilution provisions and multiple X preferences. Also,...
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