Real Estate Asset Liquidation

Crunching the numbers: liquidation preferences, conversion, and participation 📊 In our recent VC class at Stanford University, we examined the features of convertible preferred stock – what VCs receive for their investments in startups – and their impact on founder payouts. While the theory is important, real-world examples drive the lessons home. Case Study 1: Jawbone – Jawbone's last convertible preferred stock (Series Z) featured a 3X liquidation preference – When the company went out of business a year later, all common stockholders (founders, employees) were wiped out – Founders, beware of high liquidation preferences! Case Study 2: Uber – Uber's Series Seed convertible preferred stock had a $0.07 conversion price – Each subsequent round was at a substantially higher valuation, meaning low dilution for existing shareholders – At IPO, each Series Seed share converted into one common share worth around $45, a more than 500X return – Up rounds often matter more than the initial valuation Key takeaways for founders: • Terms matter – preferences, conversions, and participation all impact your payout • Model it out – build a cap table to understand your dilution and payout curves • Leverage advisors – lean on experienced startup counsel to ensure fair terms • Avoid non-standard terms, such as multiple liquidation preferences, early on #stanford #stanfordgsb #venturecapital #startups #innovation #technology #founders #venturemindset 

𝐀 $𝟔𝟎𝐌 𝐞𝐱𝐢𝐭 𝐰𝐡𝐞𝐫𝐞 𝐟𝐨𝐮𝐧𝐝𝐞𝐫𝐬 𝐦𝐚𝐝𝐞 𝐧𝐨𝐭𝐡𝐢𝐧𝐠. On paper, that sounds impossible. In venture, it’s more common than people think. In 𝟐𝟎𝟎𝟓, a company called 𝐓𝐫𝐚𝐝𝐨𝐬 was sold for ~$𝟔𝟎𝐌. A reasonable outcome in most scenarios. Except – the founders and common shareholders walked away with zero. Investors, protected by liquidation preferences, took home ~$49M – well above their invested capital. 𝐒𝐚𝐦𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲. 𝐒𝐚𝐦𝐞 𝐞𝐱𝐢𝐭. 𝐃𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐭 𝐨𝐮𝐭𝐜𝐨𝐦𝐞𝐬. This is where venture capital becomes less about business performance – and more about capital structure. Liquidation preference was designed as downside protection. Investors get their money back (often with a multiple) before anyone else sees returns. Fair in principle. But as rounds stack up, so do preferences. And that’s where alignment begins to break. As Mark Suster puts it, liquidation preferences can create “flat spots” – ranges where a $30M exit and a $50M exit deliver the same outcome for certain investors. Which changes behaviour. Investors may prefer earlier exits that secure their downside. Founders, seeing limited upside, may stop pushing for exceptional outcomes. Employees – sitting last in the payout order – often have the least visibility and the most risk. 𝐑𝐞𝐬𝐞𝐚𝐫𝐜𝐡 𝐨𝐧 𝐞𝐧𝐭𝐫𝐞𝐩𝐫𝐞𝐧𝐞𝐮𝐫𝐢𝐚𝐥 𝐦𝐨𝐭𝐢𝐯𝐚𝐭𝐢𝐨𝐧 also shows that founders persist when they have real “𝐬𝐤𝐢𝐧 𝐢𝐧 𝐭𝐡𝐞 𝐠𝐚𝐦𝐞” – when outcomes meaningfully impact them. Remove that upside, and you quietly weaken the drive to build long-term. Over time, decisions start getting shaped not by what’s best for the company– but by who gets paid, and when. 𝐀𝐧𝐝 𝐭𝐡𝐚𝐭’𝐬 𝐭𝐡𝐞 𝐮𝐧𝐜𝐨𝐦𝐟𝐨𝐫𝐭𝐚𝐛𝐥𝐞 𝐫𝐞𝐚𝐥𝐢𝐭𝐲. In venture, outcomes are not just driven by how well a company performs. They’re heavily influenced by how the capital behind it is structured. Which means, long before an exit happens– the winners may already be decided. So when you look at a deal, the real question isn’t just about growth or valuation– 𝐈𝐭’𝐬 𝐚𝐛𝐨𝐮𝐭 𝐚𝐥𝐢𝐠𝐧𝐦𝐞𝐧𝐭. 𝐁𝐞𝐜𝐚𝐮𝐬𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐞𝐧𝐝, 𝐚𝐫𝐞 𝐲𝐨𝐮 𝐛𝐮𝐢𝐥𝐝𝐢𝐧𝐠 𝐚 𝐜𝐨𝐦𝐩𝐚𝐧𝐲… 𝐨𝐫 𝐚 𝐜𝐚𝐩 𝐭𝐚𝐛𝐥𝐞? #VentureCapital #StartupInvesting #CapTable #FounderEconomics #EarlyStage #VCInsights

𝐇𝐨𝐰 𝐈𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐑𝐢𝐠𝐡𝐭𝐬 𝐀𝐟𝐟𝐞𝐜𝐭 𝐓𝐡𝐞 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐎𝐟 𝐚 𝐒𝐭𝐚𝐫𝐭𝐮𝐩 We often hear stories from India about #VCs investing substantial funds in #startups that ultimately fail, with much of the blame attributed to greedy founders. However, investors, especially regarding the rights they negotiate while investing in the startup, are equally culpable. I am sharing my experience from advising an Indian tech startup in 2023. - Company: A tech company. - Investor: A venture capital firm. - Investment Amount: $10 million for a 20% equity stake. 𝐍𝐞𝐠𝐨𝐭𝐢𝐚𝐭𝐞𝐝 𝐑𝐢𝐠𝐡𝐭𝐬: - #LiquidationPreference: 1.5x. - Board Appointment: Right to appoint 2 out of 5 board members. - Approval Rights: Major transactions and annual budget. - Protective Provisions: Against dilutive financing. - Follow-on Investment Rights: Right to invest an additional $5 million at a pre-agreed valuation of $50 million. Startup's Deteriorating Performance: - Following the initial investment, the startup struggled, leading to a significant drop in its valuation. - Challenging market conditions hampered the startup's ability to secure additional funding. - The VC, utilizing its board influence, prioritized decisions favouring its own returns over the long-term health of the startup. Key Investor Rights and Their Impact: [1] Liquidation Preference: The valuation drops to $30 million. Liquidation Event: The firm is forced to liquidate. VCs Recovery: 1.5 * $10M = $15M. Available for Others: = $30M - $15M = $15M. Impact: This leaves only half of the liquidation proceeds for other stakeholders, potentially crippling payments to creditors, employees, and other equity holders. [2] Follow-on Investment Rights VC exercises its right to invest an additional $5 million at a pre-agreed valuation of $50 million, despite the company's actual valuation being much lower. New Ownership Stake: 42.86% (15/35) Impact on Startup: This dilutes other shareholders excessively and demotivates founders and employees. It could also deter other potential investors who see the terms as unfavourable and indicative of VC's control over the company. 𝐑𝐞𝐬𝐮𝐥𝐭𝐢𝐧𝐠 𝐃𝐲𝐧𝐚𝐦𝐢𝐜𝐬: - Demotivation and Departure of Key Personnel: The excessive dilution and perceived unfairness lead to key personnel leaving the company. - Difficulty in Securing Future Funding: The aggressive exercise of investor rights makes it challenging to attract new investors. - Operational Constraints: The lack of funds and strategic misalignments stifle the startup's operational capabilities. In this scenario, VC's exercise of its rights, while mathematically beneficial to it in the short term, leads to a significant devaluation of startup, demotivation among its stakeholders, and ultimately contributes to its downfall. This scenario exemplifies how investor rights if exercised without regard to the company's health and stakeholder balance, can lead to adverse outcomes for the company. #valuation

#Blockchain | #FinTech | #DeFi : Bank of Canada staff paper investigates how different liquidation methods in decentralized finance (DeFi) affect #cryptocurrency prices. It specifically compares fixed-spread liquidations, common on platforms like Aave and Compound, with auction-based liquidations, primarily used by MakerDAO. The research develops a theoretical model and analyzes Ethereum blockchain data to understand the price impacts of these mechanisms. Findings suggest that auction-based liquidations generally lead to smaller price drops by fostering greater competition among liquidators. The study highlights the critical role of liquidation design in maintaining market stability within DeFi lending and mitigating the risk of fire sales. EmpowerEdge Ventures

Margin call. The mechanic that kills well-intentioned hedgers. Post 05 covered mark-to-market as a liquidity risk, with Metallgesellschaft. This goes deeper into the mechanics: exchange, OTC, the spiral, and how to size the buffer. The 5 things to understand beyond the basics. 1. Variation margin vs initial margin Initial margin is the collateral the exchange (or counterparty) requires when you open a futures position. Variation margin is the daily flow: every price change creating a loss is charged the next day, every gain credited. Together they are the real liquidity exposure. When price moves a lot, the exchange can raise initial margin ("margin hike") while variation margin rips, and the total can double or triple in days. 2. CCP vs OTC On an exchange the counterparty is the central counterparty (CCP), which requires daily variation margin automatically. In OTC with a bank, margin is set in the CSA (Credit Support Annex): daily, threshold (only above an exposure level), or lower-frequency. Corporate CSAs usually have thresholds, so quiet markets feel like there's no charge; when the market moves hard, the threshold is crossed and the charge starts abruptly. 3. Margin spiral The nightmare. Market moves hard against the book, variation margin rips, the company pays with cash, runs out, liquidates to raise money. The liquidation pushes the market further adverse, raising variation margin on other players, who also liquidate. Forced selling begets forced selling: a liquidity crisis becomes a market crisis. 4. Historical examples Metallgesellschaft 1993: correct crude stack-and-roll, futures margin calls decoupled from physical realization, 1.3 billion loss (post 05). Sumitomo copper 1996: concentrated LME copper position, margin call pressure, unwinding into a 2.6 billion dollar loss. WTI negative in April 2020: margin calls on ETFs and holders of the May contract, forced liquidations pushing the price to -37 in a day. LME nickel March 2022: short squeeze, margin calls ripping, the LME suspended trading and cancelled trades. 5. How to manage Three principles. First, a cash buffer sized for a stress scenario, not a central one: how much cash must be available if the market moves 2 or 3 standard deviations against the position? Second, a pre-approved committed credit line, because in stress new lines vanish exactly when you need them. Third, alignment between risk, treasury, and operations on who triggers what. Without a playbook, a crisis becomes two. Margin call is where risk management meets treasury, and hedging meets liquidity. Treating it as an operational detail leaves your most critical risk to whoever finds out last. A mature program has the scenarios mapped, the buffer sized, governance defined, and the ability to pay tested at the worst moment. How is the margin buffer sized on your desk: by VaR or by stress scenario?

Liquidity-Adjusted VaR and Expected Shortfall in Bond Portfolios -- When managing a bond portfolio, traditional Value at Risk (VaR) provides an estimate of potential losses under normal market conditions. However, it ignores one critical factor — liquidity. In fixed-income markets, liquidity risk often spikes during stress events, with widening bid-ask spreads and reduced market depth. This can significantly increase the cost of unwinding positions. -- Consider a portfolio holding corporate bonds and government bonds. Under normal market conditions, the liquidity cost of selling Treasuries is negligible, while investment-grade and especially high-yield bonds carry wider spreads. Liquidity-adjusted VaR (LVaR) builds on standard VaR by adding these costs. For instance, a portfolio with a $100 million exposure may show a VaR of $3 million at 99% confidence, but once adjusted for bond spreads, LVaR could rise to $3.5 million — a 17% increase simply due to transaction costs. -- The effect is even more pronounced in stressed markets. During liquidity shocks (such as the 2008 crisis or the March 2020 selloff), credit spreads widen sharply. High-yield bonds that normally trade with a 50 bps bid-ask spread may suddenly see spreads exceed 200 bps. This pushes the liquidity-adjusted VaR much higher, as forced liquidation would mean selling into a thinner market at deeper discounts. -- Expected Shortfall (ES), or Conditional VaR, further strengthens this picture by measuring the average loss beyond VaR. Liquidity-adjusted ES (LES) captures not just the tail losses from market volatility, but also the additional fire-sale costs of liquidating bonds in illiquid conditions. For example, if ES on the same $100 million portfolio is $5 million, liquidity adjustments under stress could increase it to $6 million or more. -- For bond portfolio managers, these metrics matter because they reflect the true cost of risk — not just from market movements, but also from liquidity constraints. Incorporating LVaR and LES into stress testing and risk frameworks ensures that portfolios are not only market-resilient but also liquidity-resilient, which is crucial in fixed income markets where liquidity can vanish exactly when it’s needed most. -- The below analysis is based on hypothetical numbers and is just provided as an example. #RiskManagement #LiquidityRisk #BondMarkets #VaR #ExpectedShortfall #FixedIncome #StressTesting #MarketRisk #LVaR #LES #Volatility #Treasury #CreditSpreads

My client found out during liquidation that his loans to the company were documented as equity.  This meant that it would be disbursed towards the end during the liquidation process.  My client, one of the three founders, had provided a loan to the company during his onboarding as a co-founder. He put in a significant sum into the company, given his commercial understanding with the other co-founders — to be put in as a loan.  However, he failed to properly document this, and owing to some miscommunications between the CS and the team, it was taken up as an investment and shares were allotted against the loan amount, that too equity shares and not preference shares.  As a result, when the company was about to go into liquidation, this co-founder reached out for guidance. Since he was not getting priority in terms of distribution of liquidity proceeds. And he was eventually left with little to no chance of recovering his money (given the insufficiency of liquidity proceeds).  During liquidation, money gets disbursed in a strict priority list (considering contractual & statutory provisions):   1. Liquidation costs & dues to government/employees (statutory) 2. Secured creditors 3. Unsecured creditors 4. Investors with liquidation preference (preference shareholders) 5. Convertible note/CCD holders (if not converted) 6. ESOP holders (converted to equity) 7. Founders & common equity shareholders   If my client’s investment had been correctly documented as a loan (which was the finalised commercial understanding), he would have been at the front of the queue for repayment during a liquidation event. Instead, he was at the very bottom, leaving him with no priority in terms of distribution of liquidity proceeds and debentures.  Essentially, even if this amount were considered as an investment and shares were issued, he had no liquidation preference, which any well-structured investment deal would have accounted for if it were properly documented.  As a founder, one should never leave things to trust. I know it’s rosy in the beginning but it gets messy in the end.  Take my advice: keep everything on paper, even loans or capital investments as low as 20k.  And most importantly, seek guidance from an experienced advisor to mitigate these risks in the future. 

#artofprocurement: Prudence of Liquidation of CPBG of a Non-Performing Contractor in an EPC Environment 1. Understanding its Role CPBG is a contractual safeguard that protects the employer against financial losses due to a contractor's non-performance or breach of obligations. CPBG ensures: 1a Financial coverage for delays, quality issues, or failure to deliver. 1b A mechanism to incentivize contractors to perform as per the contract. Risk mitigation for the employer. However, liquidating a CPBG is a drastic step, and its implications—financial, legal, and reputational—must be carefully evaluated. 2 Key Factors to Evaluate Before Liquidating a CPBG Before deciding to liquidate a CPBG, the following factors should be considered: 2a Extent of Non-Performance: Assess the severity of the contractor's underperformance. Are delays manageable, or is the contractor incapable of meeting critical milestones? 2b Root Cause Analysis: Investigate whether non-performance is due to contractor negligence, external factors (e.g., supply chain disruptions), or unforeseeable circumstances like force majeure. 2c Contractual Obligations: Review the contract terms regarding CPBG liquidation, including notice periods, resolution mechanisms, and compliance with arbitration clauses. 2d Impact on Project Timelines: Consider whether liquidating the CPBG will expedite or further delay project completion. 2e Financial Implications: Liquidating a CPBG may lead to legal disputes, increased costs for re-tendering, or reputational damage. Weigh these risks against the benefits of recovering funds. 3 Pros of Liquidating a CPBG Liquidating a CPBG can offer advantages: 3a Recovery of Financial Losses: It compensates the employer for delays, poor-quality work, or additional costs incurred in rectifying issues. 3b Accountability and Deterrence: It sends a strong message to contractors, emphasizing that non-performance will have tangible consequences. 3c Project Continuity: If the contractor’s non-performance is critical, liquidating the CPBG and replacing them can prevent further project delays. 3d Protects Employer’s Interests: It serves as a final safeguard when all other attempts at resolution have failed. 4 Cons and Risks of Liquidating a CPBG Liquidating a CPBG also comes with potential drawbacks: 4a Strained Relationships: It can damage long-term relationships with the contractor, affecting future collaborations. 4b Legal Challenges: The contractor may contest the liquidation in court, leading to prolonged disputes and legal costs. 4c Reputational Risks: Aggressive actions, especially in cases where the contractor is not entirely at fault, may harm the employer’s reputation in the industry. 4d Increased Costs: Finding a replacement contractor often leads to re-tendering, higher bids, and additional delays. 4e Collateral Damage: It may demotivate other contractors working on the project, impacting overall morale and productivity.

Here’s the key takeaway: what we just saw wasn’t simple “volatility.” It was a structural breakdown in liquidity.  • #Bitcoin dropped nearly 3%, slipping below $112K  • #Ethereum plunged 9% intraday, breaking $4,150  • More than $1.8B in leveraged positions liquidated within 24h  • Over 370,000 traders wiped out  • Total market cap erased: $150B, bringing crypto back to ~$3.95T What actually happened under the surface: • Open interest collapsed • Bid–ask spreads widened across all major venues • Market makers pulled liquidity • Retail longs with leverage got wiped in minutes Why this matters for anyone in the market:  1. Leverage risk is underestimated. A 3% #BTC move triggered billions in liquidations.  2. Official numbers undercount. CeFi margin calls, OTC repo unwinds, and DeFi liquidations often don’t appear in Coinglass stats. Real losses likely exceed $2B.  3. Strategy impact. If your playbook doesn’t account for these flush events, it’s fragile by design. And remember: this was only a small dip. Imagine a true macro shock, or a -10% move in BTC. Crypto is built on leverage. When that leverage unwinds, liquidity evaporates. Practical lesson:  • Keep part of your stack unleveraged  • Track open interest and funding rates  • Expect “unexpected” liquidations - and prepare ahead In crypto, discipline survives where greed gets punished.

"This paper examines the price impacts of #liquidations in #decentralized_finance (DeFi) lending and how they vary with fixed-spread and auction-based liquidation mechanisms.   Using a theoretical framework, we show that the impact of these mechanisms depends on the liquidator participation cost, which determines the level of competition. Auctions mitigate the price impact of liquidations when the participation cost is low, but amplify them when it is high.   Empirical analysis of #Ethereum #blockchain data shows that auction-based liquidations lead to smaller price drops by increasing competition, which raises collateral prices and reduces liquidation volumes.   These findings underscore the importance of liquidation design in promoting market stability and mitigating fire-sale #risks in DeFi #lending."   Phoebe Tian and Yu Zhu, Liquidation Mechanisms and Price Impacts in DeFi, Economic and Financial Research Department, Staff Working Paper 2025-12, Bank of Canada, March 21, 2025 #DeFi #liquidity #cryptocurrency   The full article is here: https://lnkd.in/eJ9sjdPg