Preference stacks in venture capital

Structure can be more important than $ raised

Author

Michael Morgenstern
February 13, 2024

Happy Tuesday Brex community,

In the venture funding journey, founders must astutely prioritize understanding preference stacks. These terms, dictating the order and scale of investor payouts upon exit, are fundamental to your startup's financial trajectory, transcending mere contractual details.

Before any funding round, a nuanced grasp of preference stacks is indispensable. Opting between a "1x preference" — investors reclaiming their initial outlay first — and a "2x preference" — doubling their investment on exit — carries significant implications for the allocation of residual profits. Consider a $200M exit with a $50M investment: under a "1x preference," investors retrieve $50M upfront, while a "2x preference" escalates this to $100M, profoundly impacting how the rest is divided among founders and employees.

For founders, these terms require strategic foresight in negotiation. The deal's structure often overshadows the sheer amount raised, influencing your startup's long-term prospects.

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Growing together, Michael Morgenstern

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