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.”
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 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 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.”