Liquidation preference

The right of preferred shareholders to get their money back first when the company is sold, before common shareholders get anything.

Example

A 1x preference on a $5M investment means the first $5M of any sale goes to that investor.

Important

A 1x non-participating preference is standard. Multiples (2x, 3x) or participating preferred can mean founders receive almost nothing from a decent exit. This term matters more than valuation.

Related terms

• Preferred stock — The share class investors typically receive, carrying rights common shares do not — liquidation preference, anti-dilution and often a board seat.
• Common stock — The ordinary share class held by founders and employees. Last in line if the company is sold or wound up.
• Term sheet — A short, mostly non-binding document setting out the main terms of an investment before the full legal documents are drafted.
• Participating preferred — Preferred shares that get their money back first AND then also share in what is left as if they were common shares.

Lessons that explain it

• Why companies acquire startups — Advanced. Understanding the buyer's motive tells you what your company is worth to them, and to whom. (12 min)
• Liquidation preference — The term that decides who gets paid when the company sells — and it matters more than your valuation. (12 min)
• Reading a term sheet — Two to four pages that decide the next several years. What each clause means and which ones actually matter. (15 min)

All 176 terms in the Founder glossary