Comments on: What is a cap on a participating preferred liquidation preference?

By: Yokum

Yokum — Mon, 20 Dec 2010 10:44:50 +0000

No particular shortcut. You have to read the certificate of incorporation and create a model.

By: Guest

Guest — Sat, 11 Dec 2010 02:00:10 +0000

I'm working on exit scenarios with various capital structures for different companies and was wondering if there is an easy formula to use in identifying the liquidation waterfall (i.e. at what point a particular class of participating preferred would convert to common). It seems, with each different company, I have to analyze this in great depth, but was wondering if there was a shortcut formula to quickly identify the timing of conversions…..any suggestions?

By: william

william — Mon, 01 Nov 2010 04:56:39 +0000

hello. if currently have 100,000 shares at a nominal value of £1 per share and represents 100% ownership, and want to give a way 4% of the comapny for £4000 at £1 per share, on the face of it creating 4000 shares makes sense but that actually is 3.8%. and 4167 shares is 4% leaving me with 96%. This means that the investor gets 4167 shares and not 4000, but if they paid £4000 and not £4167, then who pays for extra 167 shares.

I know its confusing, but comments are welcome., thanks

By: Guest

Guest — Sat, 23 Oct 2010 22:37:13 +0000

I am trying to understand how participating preferred works. Our company received series A funding $5M with 3x participating preferred option. Company has received an acquisition offer. Say we have 11M shares and offer is $20M, how does the common stock holders get their money after the investors get their money.

By: Yokum

Yokum — Fri, 06 Aug 2010 12:14:19 +0000

@John – don't understand the question. A participating preferred with a cap is a middle ground between non-participating and fully-participating, so it may be considered a compromise.

By: john

john — Tue, 03 Aug 2010 09:29:58 +0000

Yokum,
If an investor is looking initially for a 50% interest in a company on the initial round (after founders investment), would a participating preferred with a cap be a way to bring both sides to an agreement. the investor initially gains the equity he requires, but upon a significant liquidation event i.e. 5M investment yields an event of 100M in 5 years, would a 4x or 5x be a reasonable cap?

By: md

md — Wed, 18 Jun 2008 15:01:11 +0000

Thanks for the clarification. Appreciate your time and patience.

By: Yokum

Yokum — Wed, 18 Jun 2008 06:31:06 +0000

This is what keeps people like me in business … your fundamental understanding of how the cap works is incorrect.

The cap is done on a per share basis, not on a per investor basis. Thus, even if different investors in the Series B invest different amounts of money, each share of Series B will hit the cap at the same sale of company valuation. It’s just that some investors will own more shares and some investors will own less shares of Series B.

By: md

md — Wed, 18 Jun 2008 05:57:16 +0000

yokum,

Like you mentioned Series A does hits its cap before Series B. But within series B, since different investors have different caps ( based on their purchase price ), they would theoretically/mathematically hit their caps at different valuations.This most probably happens because of the excess amount left over after Series A hits its cap. So, it is possible that investor X hits its cap before investor Y. Hence, this gives rise to a scenario when all series B investors don’t hit their cap at the same time. So, the question then is does X participate with Y until Y hits its cap.

I will check with my team, but thanks for your input.

By: Yokum

Yokum — Wed, 18 Jun 2008 05:03:03 +0000

You should chat with your attorneys.

All holders of a particular Series (i.e. Series B) are treated the same. So each holder of Series B would hit their cap at the same time.

The question that you are probably asking is what happens if the Series A has a cap and the Series B has a cap? Often, the Series A hits their cap first (before the Series B), so after a certain sale of company valuation, the Series A should convert to common instead of taking the liquidation preference. At a certain higher value, the Series B will also be better off converting to common.