Question

a. At the outset, VCs usually take preferred stocks instead of common stocks for their investments. Why?

b.A startup offers high liquidation preference to a VC. What does that imply about the financial health of the company?

c. Discuss factors that affect the GPs’ decision to take a company public. 10 points

d. How does PE funding correlate with market performance?

Answer 1

Solution:

a)VCs usually take preferred stocks instead of common stocks for their investments because of the following:

Preferred stock is a class of stock that provides certain rights,privileges and preferrence to investors.Compared to common stock,which,which is normally held by the founders,it is a superior security.

Preferred stock takes it name from a critical feature of preferred stock called liquidation preference.It means that in case of liquidation or sale of the company,the preffered stockholders will have the option of taking their cost out or sharing in the proceeds with the founders as common stockholders.

There are number of rights and priviliges that investors secure via a preferred stock purchase,including a right to a board seat,information rights,a right to participate in future rounds to protect their ownership percentage.