We sold the company for $50M... but after six years, the four founders walked away with just $8M total.

Yes, $2M each sounds good. But after six years, it was less than they would’ve made in Big Tech compensation packages—plus equity upside. Here’s what destroyed their real exit payoff: participating preferred, with a 2x multiple. At the time, it felt like a small technical detail. At the exit, it became a black hole. Here’s how the math played out: - Raised $15M at a $20M pre-money valuation (investors owned 43%) - Term sheet included 2x participating preferred - Sold the company for $50M Payout waterfall: - Investors first pulled out 2x their money = $30M - Remaining $20M was split based on ownership: - Investors took 43% of $20M = $8.6M - Founders and team got the balance: $11.4M - After taxes, and after paying out early employees, the four founders split around $8M. This is the dark side of “successful” exits nobody warns you about. The announcement looks great. The founders? They’re wondering if it was all worth it. Fast primer: Participating vs. Non-Participating Preferred - Non-Participating Preferred = Investors pick: their liquidation preference or their ownership percentage (not both). - Participating Preferred = Investors get both. - Adding a multiple (like 2x or 3x) turbocharges how much they take first—before founders see anything. And it gets worse. Layer in compounding dividends (8% annually), and these deals bleed even more founder equity over time. I’ve seen exits where investors made $140M on $50M invested—and the founding team walked with scraps. Lesson: Treat liquidation preferences like real debt. Read your term sheets like your life depends on it—because it does.