Percent Ownership of a Company Isn’t the Same as Economic Interest

A friend of mine in CA has a small startup that has been approached by a couple of larger startups looking to do an acquihire. He reached out to me for advice and shared the rough terms, one of which was the percent ownership of the parent company: 0.2%. Now, this potential acquirer is a larger company, and worth a significant amount, but 0.2% without details doesn’t mean much.

Percent ownership of a company isn’t the same as economic interests.

After hearing the 0.2% amount I quickly asked several questions to which he didn’t have the answers:

• What does the capitalization table look like?
• How much are the liquidity preferences (often 1x the money invested)?
• What type of liquidity preferences do they have (participating preferred or non-participating preferred)?

A bonus question is “What levels of future funding are anticipated and how will that dilution affect things?” The general idea is that even if it looks like some dollar amount of equity based on percent ownership, it can be significantly less valuable in terms of economic interests and the size of exit necessary to be as good.

What else? What other considerations do you have for percent ownership vs economic interest?