Transcription
Everyone thinks an acquisition is the ultimate finish line for a startup founder. You built a business, you sold the company for 50 million, you popped the champy, you retire.
But the truth is you can sell your life's work for 50 million dollars and legally walk away with absolutely nothing. >> [snorts] >> It happens because of a predatory term sheet mechanic called the multiple liquidation preference.
Normally when a PE or VC firm buys pref stock, they get a 1X liquidation preference. This means if the company sells, they get their original investment back before the profits are split. It's a standard downside protection.
But when capital markets dry up, sponsors get greedy. They want a 3X liquidation preference. Here's how that math destroys a founder at the closing table.
So, let's say an investor gives you 20 million for 20% of your company and a couple years later your growth stalls and now you're forced to sell the business for 50 million. You do the math in your head, you think the investor gets 10 million and you get to split the 40 million with you and your buddies, but you're wrong because of the 3X liquidation preference.
The investor doesn't get their 20 million dollars back first. They legally are entitled to three times their original investment before a single dollar flows down to the common stock, aka the founders. Three times 20 million is uh 60 million dollars, but the company only sold for 50. How does that work?
Well, it means the investor takes the entire 50. The founder, the employees, the early team, they get zero. So, you spent a decade building a company just to hand the keys to an investor for free.
Stop obsessing over the top line exit number. Start reading the payout waterfall. For more deep dives or McDonald's CEO size bites into how money actually moves, hit subscribe and don't build a company for free.