Liquidation preference refers to the priority given to certain investors to receive their money back before others when a company is sold or goes bankrupt. This means that some investors are paid first, while others may not receive any payment at all. It can be compared to a situation where you and a friend both lend money to someone, but your friend is repaid before you.
Liquidation preference refers to the right of preferred shareholders to receive a specific distribution before common shareholders in the event of a corporation’s liquidation. For instance, if a company goes bankrupt and is liquidated, preferred shareholders will be entitled to their portion of the assets before common shareholders receive anything. To illustrate, if a company has $10 million in assets and preferred shareholders have a liquidation preference of $2 million, they will receive $2 million before the remaining $8 million is distributed to common shareholders. This example demonstrates the practical application of liquidation preference, which grants preferred shareholders a higher priority in receiving their share of the assets compared to common shareholders.
Liquidation preference is a term used in venture capital and private equity financing that refers to the order in which investors are paid back in the event of a company’s liquidation or sale.
Liquidation preference determines the order in which investors are paid back their investment and any accrued dividends or interest before any remaining proceeds are distributed to other shareholders.
Investors with a higher liquidation preference get paid first in a liquidation event.
A participating liquidation preference allows investors to receive their liquidation preference and also participate in any remaining proceeds on a pro-rata basis with other shareholders.
A non-participating liquidation preference only allows investors to receive their liquidation preference and does not allow them to participate in any remaining proceeds.
Yes, liquidation preference can be negotiated between investors and the company during the financing process.
If a company is sold for less than the liquidation preference amount, investors with a liquidation preference will receive their full investment amount, but may not receive any additional proceeds.
If a company is sold for more than the liquidation preference amount, investors with a participating liquidation preference will receive their full investment amount plus a pro-rata share of any additional proceeds.
Yes, liquidation preference can be waived by investors if they agree to do so.
Liquidation preference can affect common shareholders by reducing the amount of proceeds they receive in a liquidation event, as investors with a higher liquidation preference are paid first.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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