How to sell preference shares
Preference shares explained
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hello my name is go solo I'm the
co-founder and CEO of Syndicate room and
today I'm going to explain how
preference shares and that what they
typically come with which is liquidation
preferences may have an impact on your
own financial return on your own
investment let's assume that you have
invested into a company when it was
small and it was worth 4 million pounds
and let's assume you invested 1 million
pounds and got 25% on B shares at the
same time let's assume that venture
capitalists for example invested 25% for
the same 1 million as well but in
preference shares which I'm calling pref
now let now let's imagine that this
company goes on to become really
successful and out of 4 million it
actually goes up to become say 100
million pound company now the way this
100 million pounds are distributed
amongst all shareholdings when the
companies bought out by a hundred
million when there are liquidation
preferences that typically means that
the 1 million pounds invested by the
preference share shareholders gets taken
out first and then the remaining 99
million gets distributed according to
the percentage of shareholding in these
guys would be 25 percent to the
pressures 25 percent to Bri shares and
the remaining two to the founders
problem now this sounds like a great
return right B Class shares just got
twenty four point seventy five million
return out of a 1 million investment and
preference shares got 20 got a little
bit more because they got their million
on first so they got 24 25 point 75
million return now no one will be upset
with a return that is over 24 times the
money that they've invested
however the prompt becomes what happens
if the company doesn't unfortunately
doesn't go on to become successful and
goes down in value and which might
happen down to two million pound value
total value and it's bought out by
another company for two million pounds
let's have a look at what happens when
this down round or this sale for two
million pounds happens out of the two
million pounds the liquidation
preference means that the preference
share shareholders take they still take
the money they've invested first so they
take 1 million out so that goes to the
pressures now the remaining 1 million
pounds is distributed equally so 25% for
pressures and then 25% for B shares this
means that the final outcome if the
company doesn't do well or as well as
hoped
this means that pressures will end up
with the 1 million pounds that they take
out first Plus 25% of the second million
pounds so they end up with 1.25 million
so they end up with a positive return
not much return but a positive return
the downside is incredibly limited by
this liquidation preference because they
take their money out first the B
shareholders that that shared all the
risk from the beginning all the way
throughout and then all the way to the
very end to 2 million pounds only take
25% of the million pounds so they take
250,000 pounds which is a negative of
750,000 pounds compared to what they the
million pounds they had in
before so if you look at the final
result the preference shareholders will
will be in profit not a lot but it will
be in profit whereas the b-class shares
will actually lose a very significant
amount of money about three quarters of
their investment and this is why you
should be very careful when investing
and the different classes of shares when
compared to other investors is because
just because you got seen in same
company he doesn't mean that in getting
the same deal our investment and
investment opportunity thank you I hope
you liked this video hope this helped
explaining what liquidation preferences
are and I hope you enjoy watching the
other videos that we are making
available as part of this series thank
you
