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The non-participating preference...

Автор: olegj от 4-04-2013, 13:17

The non-participating preference...

The non-participating preference shares (nonparticipating preferred). This preference shares, which do not give the right to participate in the distribution of the remaining after payment of the liquidation privileges funds. For example, a venture capitalist investing in the company $ 10 million in exchange for a non-participating preference shares with a liquidation single franchise.

Suppose that, after conversion to ordinary shares they represent 50% of the company's common stock. In this case, the venture capitalist must convert the preference shares into ordinary only if the firm sold more than $ 20 million at a price of only $ 20 million more than 50% of the ordinary shares will be given more than a one-time liquidation privilege. The cost of $ 10 million to $ 20 million is a "zone of indifference" to a venture capitalist, his share of the proceeds from the sale of the company's assets is $ 10 million over the entire interval.

The non-participating preference...

This example illustrates the main drawback of the non-participating preference shares: in the "zone of indifference" venture capitalist is interested in maximizing the value of the company and its interests with the interests of other shareholders. Fully Participating preferred stock (fullyparticipating preferred) - it's preferred shares whose owners, having received a liquidation premium involved in the distribution of any remaining funds on a par with the holders of common shares, and is adhered to such proportion as if the preferred shares were converted into ordinary shares. Venture capitalist never fully converts its preferred shares involved, since in any case advantageous to obtain a liquidation premium, and then - his share of the remaining funds.

It is believed that a fully participating preferred stock as to protect the rights of venture capitalists. Preferred shares with limited participation (participated preferred subject to a cap) - this is the most common type of preferred shares. This category of shares gives the right to receive liquidation privilege, and then participate in the distribution of the remaining funds, up until a certain "ceiling (cap), after which any remaining funds get the owners of ordinary shares. For example, if a venture capitalist invests in a company with a $ 10 million one-time liquidation privilege and participation with the three constraints, the liquidation of the company, he could get up to $ 30 million, after which any remaining funds will be transferred to the holders of common shares.

We assume that the conversion of preferred shares will amount to 50% of equity (ie, the final number of ordinary shares). If the company was sold for $ 60 million, the first holders of preferred shares will receive the privilege of liquidation in the amount of $ 10 million following $ 40 million distributed on a "50/50" between the holders of common and preferred shares (and percentage of venture capitalists will reach the "ceiling" ie $ 30 million). The remaining $ 10 million will be paid to holders of common shares.

But if the company is sold for $ 70 million, the calculations change. In this case, the venture capitalist has to convert their shares into ordinary shares. After the conversion, he became the owner of 50% of the ordinary shares and the liquidation lose the privilege, but it gets 50% of the proceeds, or $ 35 million As the capital structure of the company is becoming more complex and complicated calculations.

The non-participating preference...

To model the distribution of the proceeds in a complex capital structure using special computer programs. Types of debt financing and bridge financing In the initial stages of development of young innovative companies are characterized by a lack of positive cash flows and, therefore, the inability to service its debt obligations. Thus, prior to the IPO or the sale of the company (trade sale) is the main form of equity financing. However, this does not mean that businesses in the early stages of development do not use debt financing.

Young companies still do not have a positive cash flow, able to meet debt obligations in the two cases:

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