Liquidation preference

How it works

Standard preferred has a 1× non-participating liquidation preference: investors get their money back first, then the remaining proceeds are split among common shareholders. Aggressive terms include 2× or 3× multiples, or participating preferred (where investors get their preference AND their pro-rata share of the remaining proceeds). Stacked preferences from multiple rounds can dramatically reduce common-stock proceeds in a low-multiple exit.

Worked example

A company sells for $50M. An investor holds $10M of 1× participating preferred for 20% of the company. They get back their $10M, then 20% of the remaining $40M = $8M, for $18M total.

Related terms

• Term sheet
  A term sheet is a non-binding document outlining the key terms of a proposed investment — valuation, amount, board seats, liquidation preference, anti-dilution, and other rights.
• Anti-dilution protection
  Anti-dilution protection adjusts an investor's share price downward if the company later raises at a lower valuation (a 'down round'), preserving their economic position.
• Dilution
  Dilution is the reduction in an existing shareholder's ownership percentage that happens when a company issues new shares — typically when raising a new round.