Question about slide 16: Why is selling preferred shares is more beneficial to founders than convertible debt?
Preferred stock, in contrast, acts like convertible debt with an infinite expiry date -- presuming, of course, that there aren't terms allowing the investor to force an exit at some point.
I'm really not sure how preferred acts "like" convertible debt. They are radically different things. The main value of a convert is a) nobody really needs to lead, as it is usually drafted by the startup, b) it is cheaper and easier on the leg a side, and c) it doesn't set a valuation on the company.
Naval: Generally, even in the startup side, it’s probably better to do a preferred round because these are the times to set your terms very favorably for yourself, and they form a precedent for what happens when you do later rounds, whereas if you’re negotiating, if your first negotiation is with a VC you’re not going to set yourself the friendliest terms. So there’s nothing wrong with doing a preferred round, it’s just that the expense is slightly higher, but it’s not tremendously higher.
Seems like the premise here is that VCs will actually take that valuation into account during the round A. How common is that? (versus VCs trying to set the valuation regardless of valuation of the round done without them)
Instead, the terms referred to are all the other things that make stock 'preferred', and having an existing set of preferred stockholders makes it a little harder for later VCs to introduce new and different preferences. (And if they do, they may need to cut in the prior preferreds.) The transcript has more details.