Preferred Shares by Jon Moulton

esynergyuk — Fri, 09 Sep 2011 10:07:37 +0000

Can anyone tell me why we need to fund early stage companies with these silly things?

Drawbacks are obvious:

High legal bills and complexity
Very difficult downrounds. Some companies fail in the effort because of the power of the preferred holder
Division of interest at low (but realistic) exit values means companies are not sold when they should be and struggle on or fail
They provide a convenient way of kidology – if a new round of alphabetic complexity is done at £2/share with a 3x preference then obviously no-one needs to write down their £2/share value …..
They are often used to wipe out the rights and influence of early investors in favour of VCs (who’s ability to be better controllers is shown by results to be far from clear)

Why do we do them?