Why Dividends Matter

Somehow when you see that little clause on the term sheet about an 8% dividend for the preferred shares, it doesn’t seem that big of a deal at the time.  But to put it in perspective, let’s take a typical "success" story and see how that dividend affects the deal.

Imagine a scenario where a startup raises $14.5MM in 4 rounds (seed plus A, B and C) and that each round has the 8% compounding dividend paid on exit.  Further, let’s imagine the company sells for $75MM.  Here’s the cash flow:

Date Cashflow
Year 1 -500
Year 2 -2000
Year 3 -5000
Year 4 -7000
Year 5 0
Year 6 0
Year 7 75000

In this scenario, the dividend results in an extra $4.9MM paid to the preferred shares which is about 6% of the sale economics.  So the way to think about this little term is whether you want to give a 6% vig to your investor.