FIGURE 4 (2) Liquidation Preference: Investor Favorable: In the event of any liquidation or winding up of the Company, the holders of the Series [A] Preferred shall be entitled to receive in preference to the holders of the Common Stock a total liquidation amount equal to [three] times the Original Purchase Price per share plus any declared but

however valuations that are prematurely high in early rounds can adversely affect the marketability of a company in a later round. Investors who come to the table may sense that the management and its previous investors had lofty and inappropriate expectations and that as a result management may be difficult to work with or to rely on when it comes

FIGURE 10 (9) Board Composition and Meetings: Investor Favorable: The size of the Company's Board of Directors shall initially be set at [three]. The holders of the Series [A] preferred, voting as a separate class, shall be entitled to elect two members of the Company's Board of Directors, the holders of the Common Stock shall be entitled to elect

The most Investor Favorable clause implements what is called a full ratchet, which means that the effective cost and ownership percentage in the company for the preferred investor who invested at a given price in a prior round adjusts so that the cost and ownership percentage to the old investor is as if that investor invested in the new round

FIGURE 3 Rights, Preferences, and Privileges of the Series [A] Preferred. (1) Dividend Provisions: Investor Favorable: The holders of the Series [A] Preferred shall be entitled to receive cumulative dividends in preference to any dividend on the Common Stock at the rate of 15 percent of the Original Purchase Price per annum, when and as declared by

Consequently, there are two variables that differentiate the Investor Favorable and Company Favorable clauses in Figure 6. They are the number of times the original purchase price of the preferred stock will automatically convert into common and facilitate a public offering, and the amount of money that will qualify an IPO as acceptable to the

The degree of influence that a board can have over the direction of a company is diluted unless a board has a balance of management, independent industry experts, and financial investors.

Essentially, founders see themselves getting diluted during each subsequent financing. Although dilution is a typical part of each subsequent round of financing, they sometimes want to be awarded options for their role as employees. If they do, the founders should be prepared to raise the bar and tie additional options awards to improved

Beware of Strategic Partners That Become Investors A final red flag, for both investors and entrepreneurs, is when a firm's strategic partner is interested in becoming an investor in that company.