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The Difference in Perception Between the United States and Japan Surrounding Preferred Stock Conditions in Startup Investments
- Writing language: Korean
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Base country: Japan
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- Economy
0000-00-00 00:00:00
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Summarized by durumis AI
- The debate surrounding preferred stock conditions has recently heated up in the Japanese startup investment market. Particularly, while participating preferred stock, which is beneficial to investors, is common in Japan, the US follows a standard of non-participating preferred stock, which is more beneficial to startups, highlighting a clear difference between the two countries.
- Participating preferred stock allows investors to share in profits even during a sale, while non-participating preferred stock only allows investors to recover their initial investment, with the remaining profits going to the startup.
- While the US faces criticism that participating preferred stock hinders startup growth and drives entrepreneurs overseas, Japan views it as a mechanism to address distrust in entrepreneurs.
Recently, the Japanese startup investment market has been embroiled in controversy surrounding the terms of preferred shares. This stems from a distinct difference in startup investment practices between Japan and the United States. Specifically, there is a gap in perspectives between the two countries regarding the design of preferred shares, with participating and non-participating types. In Japan, participating types, which are advantageous for investors, are common, while non-participating types, which are beneficial for startups, are the standard in the United States.
Preferred shares are a type of share stipulated in company law, granting holders priority in receiving dividends and residual asset distribution compared to common shareholders. When a company is sold through an M&A, the preferred shareholders receive their investment first, and the remaining amount is distributed to other shareholders. In the participating type, preferred shareholders also share the remaining proceeds from the sale with common shareholders, while in the non-participating type, preferred shareholders only recover their principal investment, and the rest is distributed to common shareholders.
In Japan, a whopping 97% of startups issue participating preferred shares, which are investor-friendly. Conversely, in the United States, over 95% of startups favor non-participating types, which are startup-friendly. There are various interpretations regarding the reason for this stark contrast.
Some argue that Japan's preference for participating types is due to the smaller size of its M&A market. However, there are counterarguments that even within the United States, intense competition among VCs creates incentives to maximize profits through participating types. Another explanation suggests that Japanese companies favor participating types to drive up their valuation (company valuation), but it is also criticized that most entrepreneurs do not fully understand the difference between participating and non-participating types.
US investors like Y Combinator strongly criticize investors who introduce participating types. They argue that participating types overly advocate for the investor's interests, undermining the startup's growth incentives, ultimately driving out sound entrepreneurs from the country. On the other hand, in Japan, there is a perspective that participating types are demanded to prevent moral hazard due to a lack of trust in entrepreneurs.
In a situation where mutual distrust prevails among stakeholders, long-term collaborative growth becomes virtually impossible. The controversy surrounding the terms of participating and non-participating contracts ultimately suggests that building trust between entrepreneurs and investors is crucial for the development of the startup ecosystem.
