Investment Terms & Valuation

I

If you’ve not watched Angel Investing 101, go back and watch that first. If you’ve not watched Angel Investing 201, go back and watch that first. With those prerequesites, it is now time to dive into the terms of a preferred equity investment (the most common style of startup investing), the preferences attached to the preferred shares (which are common in all styles of startup investing), and how valuation works.

Terms of a preferred equity investment

To understand the next preference you first need to understand how corporations are structured, specifically how shareholders, the board, and management divide up the big decisions, and then how investors wedge themselves into those decisons.

Corporate structure, decisions, and covenants

A lot of the preferences never get used. The liquidation preference is probably the most common that is used in real deals.

Liquidation preferences

The other common preferences in startup investments.

Other common preferences

All the above terms are centered around control of the company. The valuation is the key term that sets the price of the shares.

How to value a startup

Exiting the hypothetical, let’s quickly look at a real cap table to see what all these percentages actually look like in reality.

An example cap table