I'm a founder and have never been an investor. I feel there are many things that could be improved, but I don't feel that moving investors to preferred is one of them.
My sense is that investors take a risk and that preferred protects them from a lot of downside of that risk. If they didn't have that protection, they'd need to do way way more work to protect against the risk, making it harder for startups to get/close their funding rounds.
Also, since investors price the risk in, you'd end up having to give investors more upside in the success case, which is a thing I'd personally prefer not to do.
What do you think are the upsides of investors having common stock only?
I think you already answered that question in your post. There would be incrementally more proceeds for the founders and employees in an exit that is flat or below the postmoney valuation of the Series A round. But as you also noted, this stuff doesn't exist in isolation - pull one lever and it results in other changes. In this case, that outcome would probably change how the investors think about the risk-reward and may depress the valuation itself, especially if it's relatively high.
> There would be incrementally more proceeds for the founders and employees in an exit that is flat or below the postmoney valuation of the Series A round
Right, I understand the outcome, but why do we want to do that.? What problem is solved by this? I'm trying to extract the benefits so that we can weigh them against the downsides.
I think it just comes down to risk preferences. If you optimize for a higher valuation and give the investor downside protection for that, then you own more of the business and therefore more of the upside. If you choose to better optimize for the downside by taking away investor downside protection, you may end up with a lower valuation, lower ownership of the company and lower upside.
Ya... Preference means higher valuations means more cash. So employees can get less diluted (upside), higher salary (downside), and bigger team (derisking=both). Removing will lose those.
Removing preference may seem like it more strongly aligns existing team during critical events... But that'd get priced in to the above, say by 80% based on today's preferred vs common. Ouch!
Todays push to 1x participating vs higher in older days is great. I do agree about misalignment during some critical events..
My sense is that investors take a risk and that preferred protects them from a lot of downside of that risk. If they didn't have that protection, they'd need to do way way more work to protect against the risk, making it harder for startups to get/close their funding rounds.
Also, since investors price the risk in, you'd end up having to give investors more upside in the success case, which is a thing I'd personally prefer not to do.
What do you think are the upsides of investors having common stock only?