Definition
Convertible Preference Liquidation Stack
The liquidation stack is the order in which different classes of preferred shares get paid their liquidation preference in an exit.
When a startup is sold, each round of preferred investors has a liquidation preference, and the 'stack' determines who gets paid first. In a 'stacked' (seniority) structure, later investors are paid before earlier ones; in a 'pari passu' structure, all preferred holders share proportionately. After preferences are satisfied, the remainder goes to common shareholders.
In a modest exit, a tall preference stack can leave founders and employees (holding common shares) with little. Understanding the stack is essential to seeing how exit proceeds will actually be divided.
Related terms
- Liquidation PreferenceA liquidation preference gives preferred investors the right to get their money back (or a multiple of it) before common shareholders in an exit or wind-up.
- Preferred Shares (Startup)Preferred shares are the class of equity VCs typically receive, carrying special rights such as liquidation preference and anti-dilution over common shares.
- Exit (Startup/PE)An exit is the event through which investors realise the value of their stake — typically an IPO, acquisition or secondary sale.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.