What is a Liquidation Preference?
Liquidation Preference
Liquidation Preference is a protective legal clause in a term sheet that determines the order and amount of payout to preferred shareholders relative to common shareholders in an exit.
Detailed Deep Dive
Liquidation Preference is a protective legal clause in a term sheet that determines the order and amount of payout to preferred shareholders (investors) relative to common shareholders (founders and employees) in an exit event (like a sale or liquidation). A standard "1x non-participating" liquidation preference ensures investors get their initial investment back first, or can convert their preferred shares to common to share proportionally.
Frequently Asked Questions
Q:What is the standard liquidation preference?
A 1x non-participating liquidation preference, ensuring the investor gets their original investment back before common shareholders receive payouts.
Q:What is participating liquidation preference?
An investor-friendly term where the investor gets their initial investment back *and* shares in the remaining proceeds alongside common holders.
Quick Facts
- CategoryLegal
- Key ApplicationExit distribution payouts and deal structure parameters
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