> investors agree to grant higher valuations... in exchange for guarantees that they'll get their money back first if the company goes public or sells.
Is that not normal? To pay your investors and other preferred stock holders first (along with your creditors and such) back first before those who were granted common stock.
Or is the author saying the preferred/common stock deal is just a tech industry thing?
Yes it is normal for investors to be repaid first, However the article is saying is that there is a LIFO arrangement for different investors. Last in , first out.
Example: C round investors , in exchange for new, higher valuation, will be repaid before B or seed round investors. The Liquidation Preference.
If C rounders are paying up for this protection, then I guess it's ok. And if the C round is led by firms that primarily invest in public markets ( T Rowe Price, Wellington, Fidelity etc) then the private company is hoping those firms anchor the next round - an IPO at at least the same or higher valuation.
What is the disaster is when the exit comes, and other public fund managers not previously involved in the deal that need to absorb the remainder of the demand balk at the valuation proposed by the investment bank leading the deal. The public round fetches a lower valuation than the most recent private round(s), and people are not pleased.
Is that not normal? To pay your investors and other preferred stock holders first (along with your creditors and such) back first before those who were granted common stock.
Or is the author saying the preferred/common stock deal is just a tech industry thing?