What are the most common ways to structure preferred stock investments?

Preferred stock is an equity security with specific preferences over common stock, such as priority in receiving dividends and assets in case of liquidation. It can be structured with various features and terms, including a fixed or adjustable dividend rate, cumulative or non-cumulative dividends, convertible stock, participating stock, callable stock, maturity date, redemption provisions, liquidation preference, adjustment mechanisms, voting rights, conversion price, anti-dilution provisions, warrants or equity kickers, exchangeable stock, preference ranking, and restrictions and covenants. The terms of preferred stock investments are often subject to negotiation between issuers and investors.

At the end of the day, the purpose is to create a balanced structure that is both investor-friendly and founder-friendly. NVCA has template documents for your SPA, IRA etc and I'd recommend sticking to those for a balanced approach.

Priority in Liquidation: Preferred stockholders typically have higher priority than common stockholders in the event of liquidation, but the exact terms can vary. Some preferred stocks may have seniority over others.

Non-participating Under this type, the investor has the option to either 1) exercise his/her liquidation preference or 2) convert their preferred shares into common equivalent shares (where equity ownership % is derived) and be paid a proportion of the proceeds based on their equity ownership of the company. This point of indifference is called the conversion threshold. Participating For example, an investor invested $1m and agreed to 1x participating liquidation preference in exchange for 20% ownership. If the company was sold for $2m, the investor would be guaranteed $1m and then an additional 20% of the remaining proceeds.

Participating vs. Non-Participating: Participating preferred stock allows investors to receive additional dividends beyond the fixed rate if the company performs exceptionally well. Non-participating preferred stock only receives the fixed dividend.

I have seen full price protection only once; rest of the deals have always been weighted average price protection. I will be concerned if the founder is wiling to offer full price protection and set a precedent for future rounds.

Full protection is unusual indeed. From what I see in German VC industry, it is overall standard to have weighted average clauses. Founders should not move away from that standard. If an investor is asking for full ratchet protection - stay away!

When it comes to voting, balancing power and protecting all investors' interests is key for strong founding teams and happy backers long-term. Giving prefs a seat at the table suits both long-term interest alignment and fairness, just make sure the votes line up with their invested risk.

Preferred shares can get complex, make sure any deal is structured simply and fair for all involved from the get-go. Also consider allowing preferred investors to convert to common stock as your company grows. This can help keep them incentivized and onboard longer term.

Again, based on my humble knowledge, it's more like "preference stock"! It's not just a chair at the table; it's the comfortable executive chair. If we have preferred stock, we're not just owners; we have clauses for capes. The value? Our magic wand. Are we watering down? Since we have abilities that stop dilution, it's more like an illusion. In charge? We have the first word. Putting money into startups isn't just about making money; it's also about creating futures, seeing dreams come true, and sometimes just enjoying the ride in a unicorn. If someone asks you about structuring preferred stock, you should compare it to making a rocket ship: you need the right parts, a skilled team, and the drive to reach the stars.

It is important to balance the terms, it can be very tempting to propose clauses that are heavily tilted towards you as the investor however that can sometimes be short sighted in multiple ways, as it sets a precedent for following rounds that you may or may not participate in, affect company’s ability to find good strategic and capital partners in the future which can directly impact your exit outcomes and could potentially stifle the company’s prospects. Good investors thread the needle balancing the interests of their LPs with improving outcomes for the portfolio companies.