how founders sabotage themselves with pref stacks
It’s one of the easiest ways to screw over yourself and your employees— and it gets worse the buzzier your company is
Please watch your preference stack, your company has to be sold for at least that for you or your employees to make any money
Investors almost always preferred shares while founders and employees get common. Preferred shares have rights such as getting paid first in a liquidation event - often 1x what they invested, sometimes multiples on that (1.5x, 2x)
So if you raise $100M (with a 1x liq pref), the company has to exit for at least $100M before you make anything
Notably, VC valuations ≠ what acquirers or public markets will actually pay!! Early-stage VC’s usually determine valuations based on what other VC’s have recently paid similar companies, while acquirers & public markets likely use models based on the fundamentals of the business
E.g. $1M ARR, Series A investor might give it a 75x ARR multiple = say they invest $12M at $75M post valuation.
The public market SaaS multiple has averaged 5-10x Last Twelve Months (LTM) revenue over the last decade, not including the frenzy of 2020-21
LTM ≠ ARR, but to be super generous, let’s say LTM Revenue for this co is $1M, with a 10x multiple = $10M selling price, that’s still less than what was raised in the Series A
Exit money all goes to investors (who still lose money in this scenario), and employees & founders make no money
Experienced talent does this math— pref stacks and valuations that are way off base makes them hesitant to join an otherwise promising company
Many founders focus on dilution (“my company makes not even $10M in rev annually, but a VC is willing to give me $100M/$1B Post, sounds great”), but low dilution doesn’t mean a good deal if the pref stack comes back to bite