In a down market, to which many of the current players in venture capital are unaccustomed, you see some strange things. In order to attract capital, investors (who are lacking self confidence, on the one hand) and entrepreneurs (who are desperate, on the other) will sometimes resort to bizarre financing structures in order to get a deal done. A couple of cases in point, which illuminate the current landscape:
First, it is well known that nervous investors are attempting to shore up their position as they subscribe to shares in a company by creating what I call a supercharged participating preferred. "Supercharged" means that, upon a liquidity event (either a company sale an IPO), the holders of the preferred get a multiple of their money back (the amount of the initial investment, plus accrued dividends) before the inferior shareholders take anything off the table. "Participating" means that, after the preferred holders have raked in, say, two or three times their initial investment (expressed in either cash or stock depending on the structure of the liquidity event), the preferred holders then share in the remaining upside in proportion to their interest on an "as if converted" basis.
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