For early stage investments, dividends generally do not provide “venture returns” – they are simply modest juice in a deal. Mathematically, the larger the investment amount and the lower the expected exit multiple, the more the dividend matters. Automatic dividends have some nasty side effects, especially if the company runs into trouble, as they typically should be included in the solvency analysis and – if you aren’t paying attention – an automatic cumulative dividend can put you unknowingly into the zone of insolvency. Cumulative dividends can also annoying and often an accounting nightmare, especially when they are optionally in stock, cash, or a conversion adjustment.
Brad Feld has been an early stage investor and entrepreneur since 1987. He is currently a Managing Director at Foundry Group. Prior to co-founding Foundry Group, he co-founded Mobius Venture Capital and, prior to that, founded Intensity Ventures. Brad is also a co-founder of TechStars.