Aaron Olajide

16/ A great book to read to understand this and many other terms is the famous Venture Deals. This book goes through many of the different kinds of terms you might see in a term sheet. Hope this was helpful amazon.com/Venture-Deals-Sma…

16/ One thing to keep in mind is once you take in terms like this in a term sheet, then every investor you meet going forward is going to want those terms too. I get it, if you need the funding and you gotta take a deal, you do it. I just want you to go in with eyes wide open.

15/ Just to make sure you are following, a down round is when you raise more money at a valuation lower than your last round of funding. We will see these happen to more early-stage companies than ever before and they will see a lot of tricky terms like this.

14/ Since this thread has gotten a bit long let's stop here. What I want to illustrate is this is just one example of a term that founders need to look out for. They aren't common at an early stage and probably still won't but they are happening especially in down rounds.

13/ Here's an example. Let's say an investor makes an investment of $10M for 20% of a company with a 2X liquidation preference and participating preferred. If that company gets acquired for $100M the investor will get $20M AND 20% of $80M which is another $16M for $36M total.

12/ If a liquidation preference is participating preferred, then the investor gets paid out in the multiple of their initial investment like 2X AND they get paid out based on the percentage they own in the company like normal. They get their cake and eat it too

11/ If a liquidation preference is non-participating preferred, then the investor gets either paid out in the multiple of their initial investment like 2X, OR they get paid out based on the percentage they own in the company like normal.

10/ Well, there is one more part to liquidation preferences, and that is participating preferred. This is really important to know.

9/ Let us take that last example again but this time let's say the company gets acquired for $23M. Well with a 2.5X liquidation preferences on a $10M investment, Investor A would get all $23M.

8/ Now if we take that same example but change the liquidation preferences from 1X to 2.5X (which is really high). Investor A would get $25M first and everyone else would split the remaining $75M. See how this can hurt.

7/ What do I mean other investors too? Well, let us say Investor B owns 10% of your company but Investor A has the 1X liquidation preferences from the last tweet. Well instead of getting 10% of $100M, Investor B now only gets 10% of $90M along with founders and employees

6/ An example of a 1X liquidation preferences is if an investor put in $10M to your company and the company gets acquired for $100M. That investor gets their $10M first and everyone else gets their percentage of the $90M that is left. That includes other investors too

5/ The first one is liquidation preferences. These tend to come up in later-stage growth rounds but can happen at any time. liquidation preferences basically allow for an investor to take a multiple (1X, 2X, 2.5X, etc) of their investment first at an exit before anyone else.

4/ I will go into 2 (it's really one but you'll understand) such terms for founders to look out for that aren't standard at early-stage funding but that you might see in coming weeks, months, and years. We are already starting to see them

3/ Thanks to this founders typically don't see many tricky terms early on. But, due to this founders, fund managers, and sometimes even lawyers have gotten away from looking out for these terms because they aren't standard anymore. Well, that all needs to change ASAP!