In this example, we're gonna have a look at the impact that different liquidation preference scenarios have for different investors in a company, including founders and different types of venture capital investors. The scenario we're looking at here is where we've just got two founders and then a series A round where the series A round raised 15 million for the company and there was a implied share price of $20 per share and an implied pre-money valuation for the company of $20 million. We're also gonna look at the impact that the different liquidation preference scenarios have, assuming there is a liquidity event with an exit valuation of 100 million for the company. So at inception we've got two co-founders each investing half a million dollars and in return receiving 500,000 shares each, giving them each a 50% stake in the company. The company then went through a series A round where they raised a further 15 million from the series A investors and return to them 750,000 shares in return for that stake giving the series A investors a 42.9% stake in the company. We're now gonna have a look at the impact that this would have under three different liquidation preference scenarios. The first scenario is where we have full participating preferred stock with a one times preference scenario, which means that the series A investors will receive one times their invested amount as a preference distribution from the company, and then they will receive a prorata share of the remaining exit proceeds shared of prorata between all of the investors pro rata to their shareholding. So let's have a look at what this means for us in terms of the invested amounts. We can pull this down from the table above and for the stakes as well. So what we'll have a exit, the one times preference means that the series A investors get 15 million back straight away. That is all that happens in terms of those preference payments. And then the remaining amount left over is shared prorata between all of the other investors in the company. So our CEO will get their proportion of the a hundred million exit proceeds minus the amount that has been paid out as that preferred payments of the series A investors.

And then that needs to be multiplied by the ownership stake that the co-founder, the CEO has. We can then lock onto the sale proceeds C8 and also the preferred cash flows as well and copy this down for all three investors in the company. If we add this up, it'll give us the remaining 85 million from the exit proceeds. And if we add across, we can see what is received in total for both of the two co-founders and also for the series A investors. So the series A investors are doing pretty well here. They're getting paid out not only that preference 15 million, but also 42.9% of the remaining cash. In terms of analyzing if this is a good deal or not. Let's look at the multiple on invested capital or MOIC. We calculate that by taking the exit proceeds and divided by the investing capital. And you can see here because of the small amount of money invested by the co-founders, they get a massive multiple on their invested capital and the series A investors get 3.4 times their initial invested amount. The second scenario here is where we have a capped participating preference with a one-time preference and a three times cap. What that means is you get back one times your initial invested amount as the series A investor and then you get a pro rata share up to three times your initial amount. So in terms of the initial amounts, just grab those as before and then when we can say the series A investors will get their one-time preference. Back to start off with that is all the preference payments there are. We need to be a little bit careful for the series A prorata calculation. We can copy the formula from above, which says we need to look at C8 to the exit proceeds of a 100 million minus the 15 preferred payments multiplied by the ownership stake that series A investors has. And that's great apart from the fact that the series A investors exit proceeds are capped at three times their invested amount. Now that three times cap does not apply to this prorata calculation, but rather to all of the exit cash flows. So all we have to do here is cap this at two times for the prorata second step here. So what I'm gonna do is put in a another element to this formula. We're going to make it a minimum formula, so it's gonna be the minimum of the prorata share, but it's that or two times the initial invested amount. That does then put an upper limit on the amount that can be allocated to the series A investors taking the preference and the second step calculation together they're getting 45 million, which is three times their initial invested amount. For the two co-founders. we then need to allocate to them on a prorata share between the two of them, any leftover money. So we're gonna need to take the money that was received from the exit of the company, the a 100 million, and subtract from that everything that has been allocated to the series A investors. And then we need to apply that to the percentage ownership. If we look at the percentage ownership between the two co-founders, so it's gonna be a 50% stake that they then have for that second element. Again, if I lock onto everything within the bracket and copy this down, we will then get a total, which gives us the 85 million excess over that one-time preference being allocated to the series A investors from here. It's the same as we had above to get the total cash flows to the investors, which will be the a hundred million and the multiple on invested capital. We work it out by what they put in. And we can see here that this is somewhat better for the two founders. Because the exit proceeds to the series A investors is capped and it is worse for the series A investor. So the full participation approach is better for the series A investor, but worse for the founders.