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October 2005

Liquidation Preferences

Ian Grove-Stephensen of Chalkface Project asked me for my take on liquidation preference.  Well at one level they are not that far removed from some of the preferential share rights that 3i was taking back when I was an Investment Manager there.  We always used CCPPOs - Cumulative Convertable Participating Preferred Ordinary Shares.  Which of course were exactly the same as management Ords - apart from the Cumulation rights, the Conversion rights, the Participating dividend rights, and the prior ranking rights!! The argument being that as minority shareholders we needed some protections.  Of course in some tech fundings the Venture Capital investors will be the controlling shareholders so that doesn't wash. 

In some ways this just comes down to price, if the equity pricing is helped by having them then should the entrepreneur be concerned?  Well consider three scenarios, a stonking success - do we care? No.  A dismal failure - do we care? No.  A business that continues to trade but disappoints against original expectations - do we care?  A little yes but its not our biggest regret.

I guess I can see this from a number of perspectives having been a venture capital investor, but also an adviser, and FD in a VC backed business - of course the detail of the terms matters loads (and there are lots more to worry about) but ultimately the nature of your bedfellows and the price at which you get into bed with them matters loads more. 

VC Process

I've come across a good short paper on VC Process from White & Lee a West Coast US boutique corporate law firm.  It is from a US perspective but useful all the same.    Amongst other things it covers liquidation preferences, a topic of some discussion at the recent Cambridge Enterprise Conference with Andy Allars (ex Prelude) expressing some distaste for what has become a pretty standard element of the VC term sheet.

OK its a cheap shot I admit it

I've just come back from the Cambridge Enterprise Conference at Churchill CollegeChurchill_college Loads of good content of which more later.  But I couldn't resist sharing the irony that of all the technology failures traditional at such events - mising slides, powerpoint disasters - the first on was Alistair Baker the UK MD of Microsoft UK.  You guessed it his Windows Media Player presentation failed to run!