My friend spent four years building a company. Raised $3.6M. Built a real product. Launched to real users.

If they sell today, they get $0.

Not because they failed dramatically. Not because of fraud or negligence. But because of two words buried in their term sheet that they didn't understand when they signed:

Liquidation preference.

Let me show you the math that made them go silent.

The Setup

Early 2021: Seed round closes. $3.6M at a $12M post-money valuation. Strong team, compelling vision, technical founders. Everything looks perfect.

The plan: Build an amazing B2C SaaS product. Take 18-24 months to get it right. Launch when ready. Dominate the market.

  • Year 1 (2021): In beta. Building features. "Getting close."
  • Year 2 (2022): Still in beta. Refining the product. "Almost ready to launch."
  • Year 3 (2023): December launch. Finally.

The result: Brutal.

Users came—then 90% churned within the first week. The market had moved.

While they built in stealth, 100+ competitors launched, learned from users, iterated, and captured the market. By the time they shipped, they were already obsolete.

  • Year 4 (2024): Fighting against impossible odds. Better-funded competitors (some with $90M+) dominating. Team burning $60K/month. Retention still terrible. Everyone exhausted.
  • Year 5 (2025): Maybe $400K left in the bank. Team burned out. Time to face reality.

That's when my friend asked me: "If we sell now, what do I actually get?"

I pulled up their term sheet. Found the liquidation preference clause. Ran the numbers.

The answer: $0.

The Math That Breaks Founders

Here's how liquidation preferences work, and why most founders don't understand them until it's too late:

What they raised: $3.6M

Liquidation preference: 1x (standard in most term sheets)

What the company could sell for today: Maybe $500K (small user base, terrible retention, fierce competition)

How the money gets distributed:

Sale price: $500,000
Investors get (1x preference): $500,000
Remaining for founders: $0
Remaining for employees: $0

The investors lose $3.1M. The founders who worked for four years get nothing. The employees who believed in the vision get nothing.

But wait—what if they fix retention and grow revenue? What if they get to $1M ARR and sell for $5M?

Sale price: $5,000,000
Investors get (1x preference): $3,600,000
Remaining for founders/employees: $1,400,000

Sounds better, right? Let's keep going.

Nine people on the founding team and early employees. Let's say the CEO owns 20% after dilution (generous assumption).

CEO's share: 20% × $1,400,000 = $280,000
Time invested: 4 years
Annual compensation: $70,000/year

Meanwhile, an entry-level engineer (L3) at Google in Mountain View makes $249K per year. Over four years: nearly $1M.

My friend could have made 3.5x more money as a junior engineer than as a founder—even in the "successful" scenario where they 10x their revenue and sell the company.

How This Happens To Smart People

My friend isn't stupid. They're brilliant—technical, articulate, visionary. In a room with them, you instantly believe in what they're building.

But here's what happened:

Mistake #1: Built in Stealth Too Long

Three years building means three years of the market moving without you. Competitors launched, got users, learned what worked, iterated, and captured market share.

By launch day, they weren't entering a greenfield market. They were entering a bloodbath, armed with a product built on three-year-old assumptions.

Mistake #2: Ignored The Retention Signal

90% churn in week one isn't a bug. It's not a feature gap. It's not a messaging problem.

It's the market screaming: "This product doesn't solve our problem."

The right move: Full stop. Pivot or fix retention immediately. Nothing else matters.

What they did: Kept building features. Kept optimizing. Kept convincing themselves that just a few more improvements would turn it around.

Mistake #3: Wrong Team Size For The Stage

Team of nine with no product-market fit = $60K+/month burn rate = 20 months runway on $1.2M.

They should have been two to three people until retention proved the product worked. Instead, they hired for scale before finding the product. Every person accelerated their death.

Mistake #4: Never Did The Math

Four years in, they finally asked: "What do I get if we sell?"

They should have asked this question in Year 2. Would have changed everything.

Because once you understand liquidation preferences, you understand that you're not building a company to make money. You're building a company to clear a very high bar that most companies never clear.

Mistake #5: Celebrated Vanity Metrics

"Users came!" they celebrated. Meanwhile, 90% churned. Growth without retention is just expensive churn. A leaky bucket that no amount of marketing can fill.

They optimized for the wrong thing. And it killed them.

What Liquidation Preferences Really Mean

Let me explain this in the simplest possible terms, because most founders don't understand until they're signing the term sheet—and by then it's too late.

Liquidation preference = minimum sale price before founders see money.

If you raise $3.6M with a 1x liquidation preference:

  • Company must sell for $3.6M+ before you see any money
  • Below that, investors get everything, you get $0

If you raise $3.6M with a 2x liquidation preference (less common but exists):

  • Company must sell for $7.2M+ before you see any money
  • Below that, investors take everything

Here's the brutal reality:

Most venture-backed startups will return $0 to founders. Not because founders are incompetent. Not because the product was bad. But because the bar is impossibly high, and liquidation preferences mean investors get paid first.

You can work four years, build a real product, get real users, and walk away with nothing. Legally. Because that's what you agreed to.

The Questions Every Founder Should Ask (But Doesn't)

Do you know your liquidation preference terms?

Most founders can't answer this. They remember the valuation. They remember the amount raised. They don't remember the preference terms that determine whether they'll ever see money.

Do you know your number?

Your number = total raised × liquidation multiple.

Example: $3.6M raised × 1x preference = $3.6M minimum sale price before you profit.

If your company isn't worth that number today, your equity is worth $0 right now. You're working for free.

Could you sell for that number today?

Be brutally honest. Could an acquirer pay your liquidation preference amount right now and feel good about it?

If the answer is no, you're underwater. Your equity is worth nothing. You're working for equity that has no value.

If you've been underwater for 6+ months, why are you still there?

I'm serious. If your company has been worth less than your liquidation preference for two consecutive quarters, something is deeply wrong. Either fix it or leave.

What My Friend Is Doing Now

They had four options:

  • Option 1: Shut down, return $400K to investors, move on with their lives.
  • Option 2: Skeleton crew (founder + one engineer), fix retention, pray for miracle. Six months to turn it around or die.
  • Option 3: Acqui-hire to competitor (team gets jobs, founders get $0).
  • Option 4: Keep going with team of nine until money runs out. Slowly dying in public while pretending everything is fine.

They chose Option 2.

Laid off seven people—brutal, emotional, necessary. Now it's founder plus one engineer. Six months to fix retention or shut down. Last chance.

I respect the decision. But I also know the odds.

The Illusion That Traps You

Here's what broke my brain about this: For five years, I believed that raising money meant you were winning.

You see headlines: "Startup raises $50M Series B."

Your reaction: Wow, the founders must be rich now.

Wrong.

They just reset the bar higher. Now they need to sell for $50M+ before they see any money. And with a 2x preference (common in later rounds), they need $100M+ exit.

The celebration posts on LinkedIn don't mention this:

  • "Grateful for our investors! 🙌"
  • "Best team ever! 💪"
  • "Excited for this new chapter! 🚀"

What they don't say:

  • "We just agreed to work for $0 unless we exit for 10x this valuation"
  • "Our equity is currently worth nothing"
  • "We need a home run or everyone gets nothing"

The performance continues. The math doesn't change.

Why The VC Path Isn't For 95% Of Founders

Look at the actual math:

Bootstrap path:

  • Year 1: Consulting revenue while building
  • Year 2: $10K MRR, profitable
  • Year 3: $50K MRR, $600K annual run rate
  • Year 4: $100K MRR, $1.2M annual run rate
  • Founder take-home: $300K-500K/year in distributions

VC path (common scenario):

  • Year 1: Raise $3.6M, burn $60K/month
  • Year 2-3: Build, still burning, no revenue
  • Year 4: Launch, bad retention, running out of money
  • Year 5: Sell for $5M or shut down
  • Founder take-home: $280K total (if successful sale) or $0 (if not)

Even in the "successful" VC scenario, the bootstrap founder made more money and had more control.

But here's what we're not told: The VC path requires a home run. A 10x outcome. Anything less and you worked for free.

Home runs are called unicorns for a reason—because they're mythical.

The data is clear:

  • 0.05% of startups raise VC funding
  • Of those, 75% fail to return investor capital
  • Of those that succeed, most return 1-3x (below liquidation preference after dilution)
  • Unicorn outcomes: 1% of VC-backed companies

So 99% of VC-backed founders will see little to no return. But 100% of startup advice assumes you'll be the exception.

What Nobody Tells You About Term Sheets

When you're signing that term sheet, you're not thinking about liquidation preferences. You're thinking:

  • "We got funded! 🎉"
  • "We can finally hire that team"
  • "We're going to change the world"
  • "This validates everything"

What you should be thinking:

  • "What's my minimum exit value to profit?"
  • "What's the probability we exit above that number?"
  • "What am I agreeing to work for if we don't?"
  • "Is this better than bootstrapping?"

But nobody tells you to think that way. Your lawyers say "these terms are standard" (true). Your investors say "we're aligned" (false—their math is different than yours). Your accelerator says "this is how it's done" (for them, not you).

So you sign. And you don't realize what you agreed to until four years later when you're doing the math with a friend and the answer is $0.

The Consulting Path (The Alternative)

I wrote about this in my free book because I wish someone had told me earlier:

Year 1: Sell consulting while building product

  • Make $100-150K consulting
  • Build product nights/weekends
  • Validate with paying customers
  • Zero outside capital

Year 2: Transition consulting clients to product

  • Launch product to consulting customers
  • They already trust you
  • They already pay you
  • Product-market fit on easy mode

Year 3: Scale product, keep some consulting

  • $50K MRR from product
  • $5-10K/month from consulting
  • Total: $65-70K/month revenue
  • Still profitable, still controlled

Year 4: Full product, or keep hybrid

  • $100K+ MRR if full product
  • Or keep consulting for stability
  • Either way: profitable, owned, controlled

The difference:

The VC founder needs a $50M exit to make real money. The bootstrap founder is already making $300-500K/year in distributions by Year 3-4.

One path optimizes for "maybe home run in 7-10 years." The other optimizes for "definitely profitable in 2-3 years."

Most of us just want financial independence, loving families, good lives. We don't need unicorns. We need sustainability.

The Action Items (Do This Today)

If you've already raised money:

1. Find your liquidation preference

  • Open your term sheet
  • Search for "liquidation"
  • Find the multiple (1x, 2x, participating/non-participating)

2. Calculate your number

  • Total raised × liquidation multiple = minimum exit value
  • Example: $3.6M × 1x = $3.6M minimum

3. Honestly assess current value

  • Could you sell for that number today?
  • Ask an advisor or investor for reality check
  • Be brutally honest

4. If underwater (value < liquidation preference):

  • Option A: Fix core metrics in 90 days (retention, revenue, whatever is broken)
  • Option B: Pivot to different market/product
  • Option C: Shut down gracefully, return remaining capital
  • Option D: Accept you're working for $0 equity and make peace with it
  • Option E: Pretend everything is fine (worst option)

5. Set quarterly reviews

  • Every 3 months: "Are we above liquidation preference value?"
  • If no for 2 quarters: emergency mode
  • If no for 4 quarters: seriously consider exit

If you haven't raised yet:

Ask yourself honestly:

  • Do I need to swing for a home run, or do I just want a good business?
  • Could I bootstrap this instead and keep control?
  • Am I okay working for $0 if we don't exit big?
  • What's my downside scenario if this doesn't work?

The uncomfortable truth: Most founders would be better off bootstrapping. But the entire ecosystem—VCs, accelerators, tech media, LinkedIn culture—is designed to convince you otherwise.

Because they profit when you raise. They don't profit when you bootstrap.

What I Learned From My Friend

Watching this happen to someone I respect broke something in my brain.

This wasn't a bad founder. This wasn't a stupid idea. This wasn't laziness or incompetence.

This was a smart, capable, technical founder who made the same mistake thousands of founders make: They optimized for validation instead of value.

Raising money felt like winning. It looked like success. Everyone congratulated them. TechCrunch wrote about them. Conference organizers invited them to speak.

But they were just running a very expensive countdown timer. And when the timer hit zero, they had nothing to show for it except a lesson that cost four years.

I don't want this to be you.

I don't want you to work four years and walk away with $0 because you didn't understand liquidation preferences.

I don't want you to optimize for vanity metrics while retention collapses.

I don't want you to raise money because everyone else is raising money.

The Real Question

Ask yourself this: What do I actually want?

Not what does TechCrunch want. Not what does Y Combinator want. Not what do other founders on Twitter want.

What do you want?

If the answer is "financial independence and a good life," the VC path probably isn't for you. The math doesn't work for 95%+ of founders. Maybe 99%.

If the answer is "I want to build a unicorn and I'm okay with a 1% chance of success," then fine—raise money. But understand the math. Know your liquidation preference. Check your value quarterly. And don't lie to yourself about the odds.

The Bottom Line

My friend worked four years for $0. Not because they were incompetent. But because they didn't understand what they signed.

Don't be my friend.

Know your number. Do the math. Be honest.

And if you're underwater—if your company isn't worth your liquidation preference—change something. Fast.

Because four years goes by quickly. And $0 is a brutal way to learn a lesson.

The champagne celebration for raising money is the beginning of the countdown, not the victory.

Know your number. Do the math. Tell the truth.

Meet the Author: George Pu

George Pu

George Pu George Pu is a technical founder building AI-powered companies across three countries. At 27, he's bootstrapped multiple profitable businesses without VC funding, including SimpleDirect (embedded financing) and ANC (global venture studio).