VC Investment Methods
Why would a fund gain ownership through common shares instead of warrants or preferred (or vice versa).
Thanks in advance
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VCs will usually invest via preferred shares (they want their liquidation preference to be on a LIFO basis). Especially if it is a bridge financing (+ warrants) or in the event of a pay-to-play financing (where non-participating shareholders would get diluted to common stock). The general rule of thumb is that if you believe the company is on the IPO track, you don't care about the liquidation preference; you care about your % ownership of the company on a fully diluted basis (on a CSE - common stock equivalent - basis; which will depend on the conversion price for each series of financing + ITM dilutive securities). On the other hand, if you believe the company will be exited via a trade sale, you want to have a larger portion of the liquidation preference stack. These terms would be outlined in the SPA of the new round of financing and in the articles of incorporation of the company.
I guess that if the VC firm believes the company is on the IPO track, maybe it would make sense for them to take on some exit risk for more favorable terms (i.e. a larger portion of the pie / a larger % ownership fully diluted of the company vs. preferred liquidation). Maybe in this instance, the larger institutional investors did not want the new investor to have liquidation preference over them (and had a different view on exit). This would be unlikely though, since the incumbent institutional investors would control the board, and thus the exit path.
Other possible options could be a toe-hold position in the company (unlikely, but could be used to gain access to info of a competitor or prior to building a position in the company itself) or a direct secondary transaction via buying out a shareholder with common shares (more likely).
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