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« Selling Free Software: Thoughts on Open Source Economics | Main | The bridges have been burned behind you, that's good news and bad news »

November 14, 2008

Comments

FN

I realize you're trying to simplify things for your readers (which is great), but I think it's worth you mentioning liquidation preferences as they obviously have a huge impact on returns. In your example of the software company with $50MM in revenues valued at $200MM, odds are it has as much $100MM of capital invested in it. So an employee with 0.25% really owns 0.25% over and above the invested capital which is probably closer to $250K.

Don

FN,
Thanks for the well taken comment. FN refers to the common investment practice of a liquidation preference. The liquidation preference causes the investor's capital to be returned prior and ahead of any other sale proceeds. In the example above, the $100MM capital would be returned prior to any other proceeds -- "off the top" so to speak -- which reduces the amount that is available to everyone else. This is particularly impactful to common stock option holders as they typically have smaller holdings.

Again, thanks for the comment.

Don

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