Is declining to accept a liquidation preference at seed level a red flag for any serious investor? What about subsequent rounds?
I think it's a pretty fair term. It prevents investors getting screwed by a sale for less than the round valuation, which could look quite attractive to a founder who could get their first million, screwing their investors in the process.
The UK tends to have stronger protection for employee shares -not that there haven't been some dodgy deals BAXI getting taken over by carpetbaggers and screwing the owners is a well know case in the UK.
And I have been on the receiving end of losing $1,000,000 at Poptel if only ICANT weren't such a bunch of ass%^&&S and the CoOp had been a bit more tech savvy - still water under the bridge.
Poptel was a worker co op btw so I had .5%
Investors may be receptive to nixing liquidation preferences, particularly early on, if the founder agrees in writing to take no employment benefits. Asking an investor to relinquish their downside protection while retaining your own (a cash salary) is cause for further questions.
That said, it's awkward to (a) ask for capital while (b) prominently communicating that you see the risk of selling the business below where they've valuing it as being non-negligible. If you, as the founder, have that little faith in the venture, a better conversation may be hand about what can be done to increase your confidence in it.
Liquidation preferences aren't required, particularly later on. But you’ll give up on other terms by filtering for investors who don't care for them.
Your mileage may vary etc.
Notes are debt. They're inherently higher than stock on the capital structure. They may convert into shares with no preference. But as long as they're notes, they're higher than even preferences shares.
When selling the a non-distressed company, equity will receive cash.
Liquidation preferences and bankruptcy priority only matter when a company is distressed.