A typical venture-capital investment is structured so that the venture capitalist gets convertible preferred stock in your company. This stock gives the venture capitalist an advantage over the common shareholders in the event of a liquidation or merger.
The preferred stock is convertible into common stock at the option of the holder—and may be automatically triggered by certain events. For example, the preferred stock would convert to common stock in the event of an initial public offering of the company to simplify the capital structure of the company and to facilitate the IPO.
Venture-capital investments are also sometimes "staged." A certain amount of money is invested right away and additional money is invested later, as certain milestones are reached. From the company’s perspective, it’s important that these milestones are clearly defined and reasonably obtainable.
To read the full story at AllBusiness.com, click here
Want to improve the way you run your business? Entrepreneurs, academics, and consultants from diverse industries offer practical advice on a variety of topics each business day.
To submit a tip for consideration, first check our archive of previous tips to make sure you're not repeating a tip someone has already contributed. Then send the tip to Small Business channel contributor Michelle Dammon Loyalka. Because of the volume of material she receives, she may not respond to each individual.