Liquidation Preference Gotcha: Angels Left Holding the Empty Bag at Exit
Remember that sweet startup you invested in years ago? Turns out, it might not be "all aboard" when it comes to exit payouts.
Here's a real-life case study about how liquidation preference can leave Angel investors feeling, well, angelically disappointed.
The Scenario:
• Angel investors put in $3M in two rounds: $5M & $8M.
• Institutional investors swoop in later with $20M, but at TWICE the liquidation preference (fancy term for who gets paid first during an exit).
They snag seniority too.
• Exit happens at $20M.
• Guess who walks away laughing? Institutional investors pocket a cool $14M ($7M invested x 2x preference).
• Angel investors?
They get their original $3M back, while Founders scoop up the remaining $3M.
Key Takeaway:
Just because you invested early at a lower valuation doesn't guarantee a proportional payout.
Those fancy investor terms like liquidation preference and seniority can seriously shift the scales at exit.
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So, should you ditch solo Angel investing and join the "investment fund club"?
There's no golden answer, but consider this:
• Dictating terms as an individual investor is tough.
Funds have more clout.
• But joining a fund means sharing returns (and control).
Be a team player, or fly solo?
The bottom line:
• Do your homework on investor terms, especially liquidation preference and seniority.
• Understand the potential risks and rewards of both individual and fund investments.
• Remember, startup investments are inherently risky.
Buckle up for a wild ride!
#startupinvesting #angelinvestor #liquidationpreference #exitstrategy #VCdeals #startuptips
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