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The liquidation preference is also extremely useful in creating a higher value class of preferred shares in comparison to the low market value of the common shares. After receiving the 5x preference, all of the rest of the funds go to the common shareholders. For example, if an investor receives 5x money invested (without subsequent participation rights), it does not matter if she owns 1% or 99% of the business for purposes of return. The liquidation preference can be far more important to the investor than the valuation of the firm. Participation rights of preferred shareholders after receiving the entitled liquidation preference.

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The priority of payment of proceeds (E.g., series B, Series A, then common shareholders).

The amount of the preference (represented as a multiple of amount invested).

The key attributes of preferred stock liquidation preference is as follows: Back to: LAW, RISK, and TRANSACTIONS Key Attributes of a Liquidation Preference You commonly see a multiple liquidation preference when the investment is in a risky venture or the startup is having difficulty in raising funds otherwise. This serves as a control mechanism to prevent the entrepreneur (or common shareholders) from seeking an early exit that does not produce a return or ample return for the investor. The business venture has to perform very well for non-preferred shareholders to receive any return. The liquidation preference is used to minimize the risk of loss to the investor above that of other non-preferred, shareholders. Commonly, investors will negotiate to receive some multiple (2x, 3x, 4x, etc.) of their money invested, before other shareholders receive any of the proceeds from the business exit event. Investors achieve this desire by incorporating a liquidation preference into the preferred class of share. Investors in a startup venture want to make certain that they will receive a return of their money invested before the entrepreneur receives any funds for the sale of the business venture, merger, liquidation, or public offering.

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Update Table of Contents What is a Liquidation Preference? Key Attributes of a Liquidation Preference Liquidation Preference Example Liquidation Preference and Participation Rights The Liquidation Preference and Conversion Rights What is a Liquidation Preference?

Liquidation preference