Lesson 4 of 8 · All lessons in this module
  1. Equity versus debt, why companies issue shares, and equity in global markets
  2. Common shares: voting rights, share classes, callable and putable shares
  3. Preference shares: cumulative, participating and convertibleVideo lesson
  4. Integrated cases: share classes, control and the liquidation ladder
  5. Private versus public equity: venture capital, buyouts and PIPEs
  6. Investing in foreign equity: direct, depository receipts, GRS and BLDRs
  7. Risk and return of different equity securities
  8. Book value, market value, ROE and the cost of equityVideo lesson

Lesson 4 of 8 · 15 min

Integrated cases: share classes, control and the liquidation ladder

A class structure has three separate layers to read: who votes, who is paid first in liquidation, and what the preferred shares take before either common class sees a cent.

In short

  • Read a share-class exhibit in three passes: votes, dividends and liquidation, then preferred claims that rank ahead of both common classes.
  • Liquidation ladders work per share, layer by layer: fill each slice for the classes entitled to it, then split the remainder equally.
  • Cumulative preferred claims in liquidation = par (liquidation preference) + arrears; they come off the top before the common ladder starts.
  • Control follows votes, not ownership; converting a high-vote class into a low-vote class can cost the founders their majority.
  • To parse a term sheet, take each word as a separate feature and ask who holds the option: issuer, holder or nobody.

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