Returns to entrepreneurs and closing the value gap between common and preferred
Here are some semi-random thoughts on preferences after my recent post on this topic. Also, an entrepreneur in town recently asked me whether, and how, he could protect himself from the inevitable dilution of future rounds. Consider this: over the past ten years venture funds, as a group, have not provided any return to their limited partners. Now, there are some funds that have done well, but the zero rate of return is true of the industry as a whole. This situation exists despite the preferences and participations that are standard features of so many venture investments. OK, what do...
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Fiduciary Duties of Directors and Rights of Preferred Stockholders
This should be of particular concern to directors appointed by holders of preferred stock. At the recent NVCA document group meeting there was a lot of discussion around a recent Delaware case (Trados) that pushes the law of fiduciary duty owed by directors generally in the direction of common stockholders. Jeffrey Wolters of the well known Delaware firm Morris, Nichols, Arsht & Tunnell LLP, recently sent around an email to the group noting another recent Delaware decision (QuadraMed) that is consistent with the Trados case. This is not going to be a lawyer's discussion of the case and the fact...
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Dividends pay dividends - or do they?
As a general proposition, with respect to dividends in venture capital style preferred stock, there are two main choices and a third that is rarely; but not never, seen, that is easy to comprehend and then there is a fourth choice that is rarely, seen and is hard to understand, but occurs with some frequency. You might ask, "What is it?" But, before we go and make our visit, let’s do a quick review of the dividend provisions that are more commonly seen....
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Angel Investments: Convertible Notes versus Preferred Stock
In the context of angel investment, one question that I get on a regular basis is whether investments should be structured as preferred stock or convertible notes. As with every question that you ask a lawyer, the answer is "it depends." Here are some thoughts on the merits and demerits of each:...
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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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