Cap table issue
Hi,
I am running into an issue and need some advice here. Say you want to acquire a company and that you offer $x which is a fair price but because the company has raised money from a greedy VC, it has a 3x liquidation pref upon change of control.
Now the seller wants a lot more $ because it took expensive money in the past.
Is it done to tell the seller to go figure things out with his investor to get rid of the 3x liquation pref? Or is it a deal killer?
Thanks
You can absolutely negotiate that point if it's going to be a deal killer. Expect the VC to not cave, but if the seller is motivated, then it's not off the table to negotiate.
More realistically, though, is that the seller negotiates a sweetener on exit, e.g. if they were to get 1m from a 100M transaction, then they negotiate 2m, or a house, or a perk or something. VC fund still gets their preference but then gives a kickback for performance or something.
But they knew full well what they were doing when they signed the 3x term sheets, and it's really not the acquier's problem to pay extra because of that. If the demand is to pay above market for someone else's decision, I'd think twice about the investment.
Thanks for the reply!
This is a special situation :
The company is not performing as planned and the founder is looking for a face saving exit that would still leave him with some $ for the work that was put into what was developed.
I will see how to get him to discuss with his VC to get rid of the liquidation pref.
Recouping their investment should be the best they can hope for at this stage.
Gotcha. Honestly if I were the VC, I wouldn't budge if it came up against me losing on my investment or breaking even--the 3x liquidation preference was put in place for this exact situation. The founder has an uphill battle and frankly this is the risk he took when he signed those docs--it's not up to anyone else to bail him out, and if he failed to produce value as an entrepreneur, then that's on him and no one else. That doesn't deserve some extra $ for the work that was put in, because that extra comes by selling at a premium, not flat.
Posting just in case choubix deletes--I think it's helpful context for others that look for this
No intention to delete the post. I sometimes come back to the replies ;)
Would you knopw what the process of removing a liquidation pref look like by any chance please?
Is that an onerous process timewise? (I assume knives will be out the moment the nego starts with the VC ;) )
lol at the seller wanting the buyer to fix their issue with taking on expensive capital
If this is a true liquidation event, the whole purpose of negotiating a 3x liquidation pref is so the founder gets nothing. You can always ask but the ask would be for an investor to give up a right they heavily negotiated. Maybe you just pay guy founder a deal bonus and call it a day.
You're not likely to get much traction trying to get the investor to rework their pref.
The only time I've seen this succeed was as a 'pre pack', where the new money in was an investment, not an acquisition. There, as you point out in your 1:55 comment, it becomes a simple assessment for them of losing money versus being diluted or having their share class converted into a new one with different terms or some other similar outcome.
That might be your path here: presenting the deal as a new majority investment.
Who has board control, is it the investor or founder?
Hi! Founder is in control actually but he couldn't get a good deal.now he is trying his luck with us ;)
I could ask him to get the VC to convert to common and give up the pref... The offer price would allow them to recoup the investment + accrued interest. Still better for them than dead money with a founder who wants out.
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