Seniority Matters

Guest post by Daniel DeWolf – Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and Contributing Editor at

There is little doubt that activity in the trading of secondary shares of private companies remains robust. Private companies are staying private longer and there seems to be an unlimited demand to buy into the newest “Unicorn” anointed each week.  As the market for secondary shares stays strong, valuations seem not to matter much to most buyers. Additionally, many buyers seem to pay little attention to whether they are buying senior preferred stock at the top of the stack, as compared to junior securities or common stock sold by many former employees.  But as we all know, things that can’t go on forever, don’t.  And, as Warren Buffet once famously said:  only when the tide goes out do you discover who has been swimming naked.

At some point a number of these Unicorns will become Unicorpses.  We recently saw this with the sale of Good Technologies to Blackberry at a huge discount to valuations achieved only weeks prior to the sale. And when these companies are forced to sell (often in order to survive), where a stockholder stands in the stack is of critical importance.

In a sale of a company, after the payment of deal expenses and any carve out for management, the senior preferred stockholders receive their money back first. After holders of the senior preferred get paid, then holders of the junior preferred are paid.  Lastly, the residual proceeds if any, is paid to the common shareholders.   In many sale situations, particularly if a sale is the only alternative to survival, the common shareholder walk away with zero.   The closer you are to the top of the stack, the more likely you will at least receive your money back.  The closer you are to common, the greater the chance you will receive back less than your basis.

In an era where investors are making wild bets on companies that often lack meaningful profit margins or even meaningful revenues, and doing so relatively blindly without receiving  the normal financial information generally available to investors in the public markets, it really does matter that you are as close to the top of the equity stack as possible. For when the market turns just a little bit South, as it inevitably will, you really don’t want to be the one swimming naked.

Daniel DeWolf | Member, Chair, Technology Practice Group, Co-Chair, Venture Capital and Emerging Companies

Daniel is Co-chair of the firm’s Venture Capital & Emerging Companies Practice Group and Chair of our Technology Practice Group. In addition to his active legal practice, he is an adjunct professor of law at the NYU Law School and he has a wealth of experience in private equity and venture capital, having co-founded Dawntreader Ventures, an early stage venture capital firm based in New York.

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Savage Deal Terms

Joseph W. Bartlett

Some of the financings in ugly investment climates are typically proposed by venture capitalists on deal terms that approach the punitive. By that I mean a Series A Round (or any professional round) which contemplates a “participating preferred” with anywhere from a ‘2X’ to a ‘3X’ return to the holder. What those abbreviated terms mean numerically is the following:

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A New “Valley Of Death” For Venture Financings

Guest post by Gabor Garai, Partner, Foley & Lardner LLP

Finding funds for early stage companies has always been a great challenge. In past venture financing cycles, it’s been the gap between the first venture financing (Series A) and the growth capital or mezzanine financing that many emerging companies were unable to bridge. This gap, called the “valley of death,” was attributed to a number of factors, but that valley of death has shifted in important ways in the recent past.

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No Action Letter On Behalf Of Citizen VC

Guest post by Daniel DeWolf – Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

The SEC has finally provided clarity as to how an issuer of securities can conduct a private placement in a password protected web page under Rule 506(b), without it being deemed a “general solicitation” and thereby being subject to the additional requirements imposed by the new Rule 506(c). The guidance has been provided by the issuance of the Citizen VC No Action Letter (the “CVC Letter”), which request was authored by Mintz Levin.

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