2-1 dave

reply in 150 words  to student responce to question along with 1 reference as well as answer 

Which one of the advantages that you mentioned is more important to the venture capital companies?  

student responce

3.Why do venture capital companies often choose preferred stock for their equity position?
First you have to understand preferred stock is a stock in which holder have preferential rights to receive fixed dividend and proceeds of liquidation over that of ordinary share/common stock.
Most Venture capital companies often choose preferred stock for their equity position as it gives VCs special preferences and protections.

The preferred stock is entitled to receive a specified amount of the proceeds from liquidation before the common stockholders receive anything. This liquidation proceeds often exceeds size of initial investment.
Preferred stockholders are entitled to receive fixed dividend payments before common stockholders receive any dividend payments.
VCs favor preferred because they tend to take an active role in the control and management of their portfolio companies, and American corporate law does not generally allow bondholders to take such a role.
Venture capital in US typically receives convertible preferred stock. It means preferred stock may be converted into common stock at some point.
If VCs were to invest in the company through common stock, the IRS would have a benchmark for valuation that is the amount paid by the VCs. On the other hand, preferred stock does not provide such a benchmark for valuing the common stock because it consists of a different bundle of rights.
Preferred stock allows startups to reduce the effective tax burden on employees, and thus the pretax cost of compensation for the firm.

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