Drag Along


As transactions started occurring that were at or below the preferred liquidation preferences, entrepreneurs and founders – not surprisingly – started to resist doing these transactions since they often weren’t getting anything in the deal.  While there are several mechanisms to address sharing consideration below the liquidation preferences (e.g. the “carve out” – which we’ll talk more extensively about some other time), the fundamental issue is that if a transaction occurs below the liquidation preferences, it’s likely that some or all of the VCs are losing money on the transaction.  The VC point of view on this varies widely (and is often dependent on the situation) – some VCs can deal with this and are happy to provide some consideration to management to get a deal done; others are stubborn in their view that since they lost money, management shouldn’t receive anything.

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