Point Nine’s Pawel has a good post on why complex liquidation preference structures are bad for your startup.  It’s worth reading.

I agree with Pawel that complex liquidation preference starts entering term sheets in tighter VC markets.  Being notoriously lemming-like in behavior, the mood pendulum swings very dramatically in the VC industry.  You can go from SAFE term sheets with $30m caps at seed stage to offers with 2X participating preferred clauses in a matter of weeks.

More than the economics involved, complex liquidation preference terms are alarming to us in what they tell us about the VCs mindset. In our experience, success in VC comes from helping build great companies.  True, strong liquidation preference terms can theoretically boost a fund’s returns by a few basis points.  However, we believe that they do more harm in the precedent they set for future investors, the needless extra pressure it extracts on the others on that cap table and impede the VCs alignment with the founders.

We try to keep our focus on the upside in every investment we do and concede that some of our investments will not work out as planned.  The best way to keep those cases to a minimum is to stay aligned with our founders as much as possible.  Sticking with simple liquidation preference structures helps us achieve that.