Liquidation preference

What is liquidation preference?

A liquidation preference is the right of preferred shareholders to get paid back before common shareholders when a company is sold, wound down, or liquidated. It's usually written as a multiple of the original investment, a '1x' preference returns the amount invested first; higher multiples or 'participating' terms pay investors even more.

Worked example

Why it matters for fast-growing companies

Liquidation preferences decide who gets paid, and how much, in every exit except a blockbuster. A participating preference or a multiple above 1x can leave founders and employees with far less than their ownership percentage suggests, especially in a modest sale. It's one of the most consequential terms you'll negotiate.

Related terms

• Fundraising & equityPreferred stockPreferred stock is the share class investors receive in a priced round, carrying rights that common stock lacks, a liquidation preference, anti-dilution protection, and often board seats or veto rights.
• Fundraising & equityTerm sheetA term sheet is a short, mostly non-binding document that lays out the key terms of a proposed investment, valuation, amount raised, liquidation preference, board seats, and investor protections, before lawyers draft the final deal.
• Fundraising & equityDown roundA down round is a funding round priced at a lower per-share valuation than the company's previous round.
• Fundraising & equityCommon stockCommon stock is the basic ownership share class held by founders, employees, and advisors, usually through options.

Frequently asked questions