[ChuckMcM]

Every time you raise money you negotiate the terms for that private placement. Lets say your start up has 3 rounds, A, B, and C, and raises $1M, $2M, and $10M with a 1x liquidation preference. Now you're business is sagging and you're about to close up shop, but an investor comes in and says "We'll provide the money but we want 3x senior liquidation" which is to say they get paid back 3X their money before anyone else. Lets say they put in $1M, and the company sells for $3M. It all goes to the last investor because they were senior in liquidation rights. Nobody else gets any money.

In terms of that last raise it is sometimes "nothing" (ie close the doors) or one more shot at making it. So from the founder's perspective the 'close the doors' option has them getting nothing, and keeping it alive long enough to sell it may or may not give them a return.

[hluska]

I know a finance prof who is going to get this in his inbox. Seriously good explanation, great work!!