Definition
Liquidation Preference
A 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.
A 1x non-participating preference means an investor gets back their invested amount first, then the rest is shared among common holders, with the investor taking whichever is higher of the preference or their as-converted share. A participating preference lets the investor take their money back and then also share in the remainder — more founder-unfriendly.
Liquidation preferences are a core protective term in venture deals. A stack of preferences across rounds can mean that in a modest exit, common shareholders (including founders and employees) receive little, which is why the multiple and participation features are heavily negotiated.
Related terms
- Term SheetA term sheet is the non-binding document that sets out the key terms of a proposed startup investment before definitive agreements are drafted.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.