Gurley explains unicorns from 2019-2021 have complex cap tables with different liquidation preferences making new rounds difficult.
“But those because those companies grew up in the ninety nine, twenty twenty one timeframe where you could raise money at excessive valuation, their cap charts are very complex and rigid.”
Gurley notes hyper-competition removed liquidation preference protection on IPOs, enabling founders to convert preferences below value.
“There was a term removed from most term sheets that gave investors the right to protect their LICPREF on an IPO, that's gone in most of these cases.”
Gurley explains stacks of liquidation preferences make transitions very hard during acute market corrections.
“these private company capitalization charts have stacks and stacks of liquidation preference, and it's when you have that acute of a correction, it's very hard to make this transition.”
Gurley explains stacked liquidation preferences on cap tables make navigating acute valuation corrections very difficult for private companies.
“it's very difficult because these private company capitalization charts have stacks and stacks of liquidation preference, and it's when you have that acute of a correction, it's very hard to make this transition.”
Gurley explains the slow IPO market results from companies struggling to reconcile liquidation preferences after sharp valuation corrections.
“And that's one of the reasons why the IPO market's been slow to get going because people have to get come to terms with all these things.”
Gurley explains liquidation preference mechanics where aggregate capital raised can claim majority of M&A proceeds in down-round scenarios.
“And in M and A outcomes, the investor can choose to take the LIC preference and not convert to common so they can get their money back.”
Gurley explains liquidation preference allows VCs to treat investments like debt, getting paid first in sales.
“So venture capitalists typically take preferred stock, and it has a term called liquidation preference, which means in a sale, they get the option to basically treat it like debt.”