I get a lot of heat every time I mention that I won’t invest without a liquidation preference. People say that it means I don’t want to take a risk. I am happy to take a risk. We do it every time we make an investment. We lose money on some of them and I can live with losing money. It is the price you have to pay for the opportunity to make money.
What I am not OK with is an unfair deal. And investing in common stock when the founder controls the company and the exit is not a fair deal.
Let’s look at who got what from the sale of Slide to Google. From Techcrunch:
Max Levchin – $39mm
Scott Banister who also took part in the series A made $5m from the sale.
BlueRun Ventures, who invested $8m in the series B round made $28m.
Fidelity Investments, part of the series D: also made their money back.
The reason Fidelity, Founders Fund, and Mayfield got their money back is they had a liquidation preference. Otherwise they would have lost money in a transaction where the founder made $39mm.
I have no issue with Max making $39mm. He took the ultimate risk, started the company, invested his own capital, and I am sure he created the exit opportunity. He should get the biggest payday. But to suggest that Founders Fund, Mayfield, and Fidelity, who invested a significant amount of capital and backed Max, should not get their money back in this situation is nuts.