Liquidation Preference

The duration for which an investor retains an investment before exit, typically measured from the date of initial acquisition to the date of sale or IPO. In private equity and venture capital, holding periods typically range from three to seven years and influence the internal rate of return calculation.

The valuation of a company immediately before a new funding round. Pre-money valuation is negotiated between the company and investors and, combined with the amount raised, determines how much equity is issued to new shareholders.

The managing entity of a private equity or venture capital fund, responsible for making investment decisions, managing portfolio companies, and generating returns for investors. GPs typically earn management fees and carried interest.

The percentage ownership interest a shareholder holds in a company. Equity stakes determine voting rights, dividend entitlements, and the share of proceeds received in a sale or liquidation event.

The process of offering shares of a private company to the public for the first time through a stock exchange listing. An IPO is a major exit route for venture capital and private equity investors, and requires extensive preparation including financial audits, regulatory compliance, and valuation.

A private equity and venture capital performance metric measuring the ratio of cumulative cash distributions returned to investors relative to the capital they have contributed. A DPI of 1.0x means investors have received back their original investment.

A non-binding document outlining the key terms and conditions of a proposed investment, including valuation, investment amount, equity stake, board rights, liquidation preferences, anti-dilution provisions, and other protective clauses. The term sheet forms the basis for negotiation before definitive legal agreements are drafted.

A transaction in which existing shareholders sell their equity to new investors rather than the company issuing new shares. Secondary sales provide liquidity to founders and early investors without diluting other shareholders or changing the company's capitalisation.

What are protective provisions and what power do they give investors?

Protective provisions grant preferred shareholders approval rights over major corporate actions (salary changes, major acquisitions, debt issuance) to prevent founders from taking actions against investor interests.

What is a cram down and why are they used in distressed financings?

A cram down forces existing shareholders to accept new investment terms (often at a punitive valuation) to fund operations, used when a company is out of capital and has few alternatives.

What is liquidation preference?

Liquidation preference specifies how proceeds from an exit are distributed between preferred shareholders (investors) and common shareholders (founders, employees), determining who gets paid first.