You raised $60M on a $274M valuation but sell for $50M do you run off with millions?!

@naboohoo

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SoundTikTok sound · A.Vivaldi The Four Season, Summer Presto; Tempo Impetuoso

Why it worked

The video addresses a common and often misunderstood concern for startup founders: what happens to their investment and potential payout when a company is sold for less than its valuation. By using a clear example and explaining a complex financial term ('liquidation preference'), it provides valuable information in an accessible way, likely resonating with its target audience.

Summary

This video explains the concept of liquidation preference in startup funding. It uses an example to illustrate how this clause can significantly impact the payout for founders and investors when a company is sold, especially at a lower valuation than initially raised.

Structure

1Introduction to the problem: selling a company for less than raised.
2Explaining liquidation preference as a VC negotiation tactic.
3Illustrating with a hypothetical 'Hotdog' company example.
4Demonstrating the impact of 1x liquidation preference.
5Explaining the potential for 2x or 3x preference and its consequences.
6Discussing the outcome for companies that shut down.
7Concluding with a hopeful note for founders.

Product placement

The video discusses venture capital, startups, and investment concepts, specifically focusing on 'liquidation preference'. While no specific product is being sold, the content educates viewers on financial terms relevant to startup founders and investors.

Original caption

Replying to @Vg #greenscreenvideo #greenscreen as a founder can run off with bags of money even tho your company flops?! #startup #startupshowup #startups #startuplife #business #investment #investo #venturecapital #fundraising #liquidity

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Transcript

as a founder you raised $60 million for your startup with your latest round valued at $274 million. You try raising additional capital for the past two years. And let's just say you sell the company for 50 million. Now do you as a founder walk away with a fat stack of cash? The answer is, probably not. Probably think as founders, they can raise a lot of money and they can probably run off with a lot of that money too. But when you're raising a lot of money, like $60 million. It's a pretty dog VC like Tiger Global and Excel. There's a little thing called a liquidation preference that VC's usually have. So what is a liquidation preference. It's basically a line item that VC's actually negotiate with you when you're raising capital. It gives them a rank on when and how much they get paid out. And give it as a way for VC's minimize their losses and the company flops sells out at a low valuation. Okay, so let's do an example. Say you have a company called Hotdog. Found an investor is willing to give you 3 million bucks on a valuation of 15 million post money. Okay, so that sounds great. I'm the CEO of company Hotdog. I latest round valued me company of 15 million. Few years ago by, I've got declining revenue. Can't raise another round and is forced to sell. let's say I sell it for $5 million. If that investor who invested in my company Hotdog at a 1X liquidation preference, $5 million sell would have $3 million of that five go back to that investor because of their liquidation preference. Even the additional two million could be divided out between the founders and other employees. Now, if an investor, negotiated a 2X or 3X liquidation preference, you can do the math from there. Meaning, you could be giving away your whole company, sell it and not make a damn penny. The case of COO, we're shutting down. Meaning, I don't think they were sold. My assumption there, they divy up what's left in the bank account. If there was anything, their investors and shareholders, hopefully employees to give them any chance of building another company in the future. Hope that helps.