Virgin Islands Clauses Relating to Preferred Returns
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How to fill out Clauses Relating To Preferred Returns?
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FAQ
A preferred return is a profit distribution preference whereby profits, either from operations, sale, or refinance, are distributed to one class of equity before another until a certain rate of return on the initial investment is reached.
A preferred return?simply called pref?describes the claim on profits given to preferred investors in a project. The preferred investors will be the first to receive returns up to a certain percentage, generally 8 to 10 percent.
In series A, a startup is positioned to develop and refine its offer and processes. During series B, the cash is needed to be able to scale up and reach a much wider market. The fundamental business is already in place at series B, with the barrier to reaching a wider market being the need for investment.
Series B financing is appropriate for companies that are ready for their development stage. They are companies that generate stable revenues, as well as earn some profits. Also, such companies generally come with solid valuations of more than $10 million.
In a true preferred return (also known as ?hard preferred return?), the operator only receives a portion of the profits from the cash flows or sale proceeds after you (the passive investor) receive your entire preferred return. This would be considered the first hurdle in the waterfall distribution schedule.
A Series B round is usually between $7 million and $10 million. Companies can expect a valuation between $30 million and $60 million. Series B funding usually comes from venture capital firms, often the same investors who led the previous round.
In Series B investors provide capital to a company in exchange for the latter's preferred shares. The majority of the deals include anti-dilution provisions like in the series A. This means that a company usually sells preferred shares that do not provide its holders with voting rights.
Founders should be prepared to give away 15-30% in equity at Series B. ?I always advise friends to aim for 15% and plan for 20%.