Founders - especially fintech founders - watch out! VC deals with high liquidation multipliers are popping up more often.
A little explanation: typically, investors in a venture deal are given preferred shares (as in, preferred over common stock, which is held by employees and founders).
The preference of those shares means many things, but the most important one is that the investor will get their money back first in the event of an exit.
The standard multiplier for that investor preference is 1x. Investors make back their full initial investment, then the remaining cash is split among all parties.
Example: investor invests $10M, business exits for $20M, investor gets money back then the remaining $10M is divided among the cap table.
But in today's challenging deal climate, investors are asking for higher liquidation multipliers. We've see 1.5x, 2x, even 3 or 4x multipliers in priced rounds in 2024.
Meaning: investor invests $10M at a 2x multiplier, business exits for $20M, investor takes all the cash 😬 Not fun!
Data below shows the relative frequency of liquidation multiples over 1x in US venture deals across sectors. At every stage, fintech companies seem to be the hardest-hit while in standard SaaS the deal terms are more "normal".
Why is fintech so different? Honestly I have only vague guesses. Would love your opinion if you have one.
Read those term sheets closely and make sure you really like your lawyer 🙏
#cartadata #termsheet #fundraising #startups #venturecapital
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