Dividends are an extension of the Liquidation Preference. Dividends for early stage companies are not typically paid out until an exit event. When they are paid, such as when the company is acquired, they combine with the liquidation preference and are paid before any common shareholders receive proceeds.
Let’s take an example. The increased number of fields with our illustration reflects how timing now enters into the equation. With dividends, how long they have been accumulating interest is critical, so we’ve added the dates to the right. The impact in this example with only two years of non cumulative dividends is an additional 8% of the proceeds ($2M x 10% x 2 years = $400k) going to the investors.
Even more dramatic is when the liquidation preference is increased from 1x to 2x. In this case, the liquidation preference is $4M with the dividends accumulating on this $4M amount ($4M x 10% x 2 years = $800k).
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