PSA: For those who don't fully understand the second paragraph above, be sure to google 'liquidation preference' before you're next evaluating an offer that includes equity or options in a private company.
If the startup is not growing extremely fast, the stock will likely not be worth very much regardless of how “clean” the terms are on the preferred stock.
If you expect stock to be a big part of your compensation then leave after 2 years of the company’s growth is not sustained and rapid.
It has a huge effect on the EV of a startup investment, and that's why VCs and founders use them.
If liquidation preferences are coming into play, you’ve already lost as a common shareholder. But you should never be in that situation to begin with. If a company is struggling or growing slowly, quit and join one that isn’t.
Liquidation preferences are cheap insurance against bad outcomes. Most startups have bad outcomes. However, people getting common stock are hurt by every share with a liquidation preference. It is in your interest, as a startup investor (or employee), to get a liquidation preference if you can.
Investor is of course completely different for many reasons and I’m not speaking to that. And anyways unless you are leading the round, which you aren’t, you are just getting whatever preferences the lead is getting anyways.
Also, it generally doesn't need a new class of shares, just a vote by the board.
Edit: Just to clarify, if you want to hire a mercenary, you can't do it expecting that they will take the same value of your stock that your true believer investors took without any of the guarantees that your investors got. They are investing time into your company and you need to make it worth it.
This also is a stupid thing to bargain: if the company keeps growing, preferred and common will be worth the exact same thing. So instead of trying to extract better preferences on the stock (which you won’t), join a fast growing company and leave if it stops growing fast.
If you're joining early enough to get enough equity to matter, you're early enough that they don't have standard bands. You can absolutely negotiate.
> if the company keeps growing, preferred and common will be worth the exact same thing.
Only if it ends in an IPO. An acquisition, even a "successful" one, can easily end up with the preferences kicking in.
The companies where liquidation preferences are going to screw you are not going to be having tender offers, because by definition nobody wants to buy the stock! If they did want to buy the stock at above the current price then liquidation preferences aren’t coming into play.
(Note: I’m sure there are examples where a company did have a tender offer at some decent price before falling off a cliff and having a bad exit where the common stock was wiped out… but that is not common at all)
Startups have a lot of toxic expectations around keeping those term sheets secret for no good reason.