Liquidation Preference
Definition
A term in a venture capital or private equity investment that determines the order and amount in which investors are paid before other shareholders in a liquidation event (sale, wind-down, or IPO). Common structures include 1x non-participating and 1x participating preferences.
Related Terms
Related FAQ
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.
Read full answer →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.
Read full answer →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.
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