Milton Pappas and his partner Bliss McCrum taught me the venture capital business. I was 25 years old and straight out of business school at the time. Ten years later, I left their firm and started Flatiron Partners. I owe a debt of gratitude to Milt and Bliss and part of the reason I blog every day is to pay it back by paying it forward.
Milt had three things he would never invest without. I have kept them and they are mine now. They are:
1) A liquidation preference
2) A right to participate pro-rata in future rounds
3) A board seat (or an observer seat and information rights)
That doesn't mean we don't expect and ask for a lot more in our standard term sheet. But what it does mean is that these three terms are non-negotiable for me. I won't invest without them.
A commenter on yesterday's post asked me why I would not invest without a liquidation preference and here is how I responded:
i invest $1mm in your company for 20%
the company is six months old and this is the first investment of outside capital
a week later you sell the company for $2.5mm
you get $2mm for six months work
i get a $500k loss
does that sound fair?
no it does not
that is why there is a liquidation preference
to protect investors from that happening to them
Some investors are willing to take this risk or structure governance and controls to protect them. I prefer the elegance of the liquidation preference. If you can't get me out at a better valuation than you want me to invest at, then just give me my money back. It's simple, it works, and it has stood the test of time, from Milton and Bliss to me and hopefully to all of you.
