Should venture investors hold common stock rather than preferred to better align with founders?

Harry Stebbings · Oct 14, 2024

Investors should not take common instead of preferred shares

Scope: stated as disagreement with Nick from Notation

22:40 20VC: Investing Lessons from FC Seeding Uber, Airtable and Coupang | Why Pro Rata is the Original Sin in VC | Why Liquidity Has Died in 2024 | Why LPs are Pissed with VCs | The Hard Truth About Seed Fund Economics with David Frankel @ Founder Collective

Harry Stebbings · Jan 6, 2025

The argument that investors should buy common stock to be more aligned with founders is wrong

Scope: expressed while saying he likes Nick Chirls personally

24:59 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Hussein Kanji · Jan 20, 2025

Investors should buy preferred rather than common, because the liquidation preference matters even in large outcomes given potential downstream volatility.

Outcomes can be volatile downstream, and in the UK common bought as secondary is easy to convert into preferred anyway.

Scope: self-described as old-fashioned; UK-specific point on converting secondary common

18:25 20VC: Why Large Seed Rounds Increase the Chances of Success | When to Sell in Venture | Why Multi-Stage Firms Do Not Do The Work | Is Europe Totally F****** and Why AI Means London Can Compete with the US with Hussein Kanji

Nick Chirls · Sep 6, 2024 · hedged

Fighting over deal structure and cap table protections is largely wasted effort, because in the few companies that actually drive fund returns common shares are worth the same as preferred.

Only a few companies per fund matter financially, and when they get acquired or go public every share class is worth the same, so structure only governs outcomes that don't matter.

Scope: scoped to financial performance; he has been considering but not yet implemented buying common instead of preferred

23:58 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Mike Maples · Jan 6, 2025

Whether you hold common or preferred has never determined whether he made or lost money — the only reason to buy common is to increase ownership or blend down the price with the founder

In the companies that work, the security type is irrelevant to outcomes; the useful use of common is a joint gain where the founder gets their headline price and the investor gets a blended price and more ownership while taking more risk

Scope: conditional on believing in the company

25:09 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Nick Chirls · Sep 6, 2024 · hedged

If buying common stock instead of preferred would improve founder alignment and win investments at the margin, seed investors should just buy common

Better alignment and access to the right companies may outweigh the downside of not getting capital back through liquidation preferences to recycle into the fund

25:13 Buy common if alignment benefit outweighs lost recyclable capital

David Frankel · Oct 14, 2024

For the earliest investors in companies that go on to raise enormous amounts, preferred shares are effectively common because they sit under the whole preference stack

On Uber their preferred sat under roughly $5B of prefs, which an LP pointed out made it equivalent to common

22:55 Early preferred becomes effectively common once buried under later preference stacks