Liquidation Analysis

Last week we talked about the cap table and I showed an example of one in a format I like. So if you are one of the founders and you own 19.6% of the business after three rounds of venture financing and you sell the company, is it possible that you would get less than 19.6% of the proceeds on the sale? The answer is yes. Not enough founders realize this.

The reason you can sell your company and not get your fully diluted ownership percentage of the proceeds is that preferred stock holders get to choose between getting their cost back or taking their fully diluted ownership percentage of the proceeds. If any of your preferred investors choose the former, and the sale price is low enough, you will not get your full percentage of the proceeds.

The way to model this out is called a liquidation analysis. I’m on vacation right now so I haven’t built the liquidation analysis (which will be a second tab in the google spreadsheet). I will do that between now and next week and we will finish this topic next monday with a demonstration of how to build a liquidation analysis.

This article was originally written by Fred Wilson on October 3, 2011 here.