Abstract
During contract negotiations with a startup, a venture capitalist (VC) can receive preferred stock and additional cash flow rights, which result in a higher return than that of common stock. Incorporation of contract terms into the payoff to investor calculation not only changes the across-financing returns distribution but also results in a better approximation of actual distribution to a limited partner (LP) than common stock. Realized returns to LPs reveal that VCs exercise all cash flow rights available in their preferred stock. Such choices are most financially beneficial in startups with relatively low exit valuations, which is also the most frequent outcome. Consequently, post-money valuation, based on common share price, becomes an overvaluation of the true price that considers all outstanding securities.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
