A new PitchBook analysis show that senior liquidation preferences create tension between collaborating VCs. As the economy has turned, problems with different liquidation preference share classes arise, especially within M&A, IPOs and new funding rounds. Example of issues include:
M&A:
- Complex cap tables: Diverse share classes lead to disagreements in M&A deals, meaning that late-stage investors may share payouts with earlier-round investors for consensus.
IPOs:
- Uniform share conversion: Early-stage investors, employees and founders will likely prefer an IPO over M&A, as IPOs convert all shares to common stock based on ownership percentages.
- Late-stage risk: IPOs below private valuations pose risks for late-stage investors, as they might end under water, in contrast to M&A deals where the liquidation preference would enter into force.
New funding rounds:
- Shareholder concerns: Existing shareholders worry about liquidation preferences higher than 1x or pay-to-play provisions from new investors.
- Hidden value reduction: Complex structures can obscure real value, especially for early-stage investors.
Read the full analysis here.
