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Building a High Profile Web/Software Company

Preferences

Each round of financing carries a preference, in for the amount invested and possibly a multiple on that.  So a 2x preference on a $5MM investment mean that that investor will get the first $10MM out of any liquidity event.  This is true until a later investor gets a preference of a higher priority preference as approved by all the investors including the one with the earlier preference.  These preferences are much of what make preferred shares preferred over common shares.  Employee stock options are convertible into common shares and carry no preference.  Preferences play into the sales price of a company, in that if a 10% investor gave $10MM at a 2x preference, you’ll need to sell the company for $200MM or the preference will eat into the amounts payable to the other owners.