2024-10-03 luck and talent are inseparable (idiot get lucky) due to great financial models, capital allocation has become better (8billion can living on earth; nicer), but finance is grappling (tail risk for ENT) - having track record of seasoned ent gives you better term - accrues and get paid in liquidation event (annual division) - typical dividend is 8% and affects liquidation preference + dividned is pushed to the right (8%) preferrred stock will have annual per share non-cumulative dividend of 8% per annum(not 8 on 8 on 8; ENT prefer non-cum) - approved by the board every year, payable when and if declared (vc is busy, upon board approval, then good for you) preferred equity payoff diagram (with dividends); graph with payoff by liquidation values where liquidation preference + dividens on x axis - 4m (investor first gets 4m, then share ; 44, 56 btw ent and investor) - double dipping (investor gets both downside protection and upside ) - exits at midling valuation (7m, no complete failure but brilliant ipo; ) convertible preferred (holder of the preferred share have the right of common; either downside protection and participate - when my stake in the game is more than 4m?) conversion prefer is better for both founder and investor as investor can have more than 4m if v > 9m, for founder, he/she can get full during 4 to 9m founder (angel investor) gets the value from 4 to 9 m (middle outcome ) - stake is disproportionally higher if founder work to make valuation to happen, additional value created goes to founder equity line and (how much ent is giving up) if investor proposed stronger downside protection, what does that tell ; if return is btetween 6-15m, how much you're giving preferred given i need to give convertible preferred, not giving too much (multiple liquidatioin, participating preferred) knowledge and bargain power (ent and vc) - vc investment is poor (returns vc firm over time u.s. -> 25% return carried interest; the rest assest under managemtn fee; market adjusted performance, better to do S&P500 - 50) - staging (non price seed rounds); founder preserve some equity, 1m (try a bit, if you could prove to me, it's a great idea, i'll give you more with better terms for you) vc pretent they give you equity (when they gave you convertible) 4m, (valuing) in fact, due to the probability of having equity, my premoney valuation is much lower. valuation if they have [PUT, CALL option (in iliquid market is difficult) ](https://claude.ai/chat/b1d001aa-c0eb-410a-a54a-c4352324a7a3)- Call Option: In this context, it represents the investor's right to participate in the upside of the company. When the company's value exceeds the conversion threshold, the investor can "call" their right to convert preferred shares into common shares, thus participating in the company's success. - Put Option: This represents the downside protection for the investor. If the company's value falls below a certain point, the investor can "put" their shares back to the company at a predetermined price (usually the original investment amount), protecting them from losses. conditional on future future bad outcomes (downround) not only you get diluted (doubly; - new ones getting better; reduce impact; potential future downround is) if every downround was consequence of (would it make sense to make anti-dilution?); if everything is under control of ent, the more incentivizing the better; don't penalize agents for those out of action (downround e.g. first covid, silicon valley bank, 2008) conversion price get reset to the new (share price is .33 -> 20m share ) | Rank | Parameter | Priority | Explanation | |------|-----------|----------|-------------| | 1 | beta_stage | Highest | Captures how the effects of different decision criteria change across funding stages (Seed, Series A, B, C, D). Critical for understanding evolving valuation dynamics. | | 2 | criteria_importance | Very High | Input matrix reflecting the importance of different factors at each stage. Directly interacts with beta_stage to determine stage-specific effects on valuation. | | 3 | uncertainty_reduction | High | Quantifies how the variance in valuations decreases in later stages. Key for understanding risk profiles across different investment stages. | | 4 | beta_startup | Medium-High | Captures startup-specific effects, accounting for unique characteristics of each company. Explains consistent over- or under-performance relative to peers. | | 5 | industry_effect | Medium | Accounts for systematic differences in valuations across industries. Important for benchmarking and comparative analysis across sectors. | - early stage, - two competing forces,