[adventured]

Investors don't inherently get screwed in the process of a quick flip if they have common shares. It means the investor is directly aligned with the founders, and makes it harder for the investor to get a return at the expense of the founders.

Investor puts in $1m for 20%.

Founders quick flip for $30m. The investor just made six times his money, and earned a payout fully aligned with the founders. Absolutely nobody got screwed.

The reason investors like liquidation preferences, is so they can improve their odds of getting their money back at least (and yielding the first dollars of return). They aren't aligning their interests with the founders in this case, they're putting their interests in front of the founders, just as debt does. Liquidation preferences are a way of saying: my equity is more important than your equity; you need my money, so I'm going to make sure my money is treated with more importance than your equity.

Liquidation preferences exist solely to protect investors from their own poor choices at the expense of the founders / earlier shareholders.

[leereeves]

Liquidation preferences exist to protect against a company raising $10 million for 20% and selling for $5 million, with the founders taking a nice payoff of $4 million and the investor losing all but $1 million.

In that scenario, without liquidation preferences, the interests of the founders and investors aren't aligned--the founders profit while the investors lose money.

[alain94040]

Try again with an exit at $2M and you'll see why the investors wouldn't be happy with common stock.