A Founder Sold His Company for ₹200 Crores—But Walked Away With ₹0.
Sounds unbelievable? It’s more common than you think.
Imagine working tirelessly for years, sacrificing sleep, and pouring your heart into building a startup. Then comes the big day—a lucrative exit deal worth ₹200 crores. But instead of celebrating, you realize you won’t see a single rupee.
The culprit? A single clause in your investor agreement—Liquidation Preference.
The Devil in the Details
Most founders are thrilled to close a funding round, often celebrating the valuation without diving deep into the terms. But one overlooked clause can make or break your financial outcome.
Here’s how Liquidation Preference works:
- The Basics: If an investor puts ₹100 crores into your startup and the company sells for ₹50 crores, they get the entire ₹50 crores before anyone else.
- The Twist: If the agreement includes a 1.5x or 2x liquidation preference, the investor is entitled to ₹150 crores or ₹200 crores, irrespective of the sale price.
Now, let’s do the math:
- If your company sells for ₹200 crores but your investor has a 2x liquidation preference, they walk away with their ₹200 crores first.
- And you? Zero. Nothing!
This is why founders must take investment agreements seriously. What seems like a harmless clause during fundraising can devastate your personal finances in the long run.
Why does this happen so often?
- Valuation Blindness: Founders get dazzled by high valuations without considering terms like liquidation preference, anti-dilution clauses, and control rights.
- Pressure to Close: Many founders are desperate to secure funding quickly and fail to negotiate terms effectively.
- Lack of Expertise: Without a financial advisor or legal counsel, founders may not fully understand the implications of such clauses.
The result? Investors de-risk their money at your expense.
What Can Founders Do?
- Take Your Time: Don’t rush into deals just because the valuation is exciting. Review every term carefully.
- Negotiate Liquidation Preferences: Push for 1x liquidation preference (or none if possible). Anything beyond 1x could come back to haunt you.
- Get Expert Advice: Engage a financial advisor or legal expert. They’ll help you identify red flags in investor agreements and structure better deals.
- Think Beyond Valuation: Fundraising isn’t just about the money. It’s about building long-term value for all stakeholders.
Your Takeaway
Liquidation preference is just one of many clauses that can determine your financial fate. As a founder, your job is not just to build a business but to protect your equity.
At ProCFO, we specialize in guiding founders through the complexities of fundraising and investor negotiations. From understanding clauses like liquidation preference to structuring fair agreements, we ensure your interests are safeguarded.
Ready to fundraise with confidence?
Engage ProCFO for expert support on your initial-stage funding and negotiation needs. Let’s secure your financial future together.
