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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



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.


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.


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