Liquidation Preference
Definition
A liquidation preference guarantees preferred shareholders get paid a set amount (usually 1x their investment) before common shareholders in an exit or wind-down.
How it comes up in fundraising
The standard venture term is a 1x non-participating preference: investors take either their money back or their ownership percentage, whichever is greater.
Frequently asked questions
What is the difference between participating and non-participating?
Non-participating investors choose preference or conversion; participating investors take the preference and then share in the remainder, double-dipping. The latter is off-market at early stages.
How do preferences affect founders in small exits?
In an exit near or below total capital raised, preferences can consume most proceeds, leaving common holders little; this is the hidden cost of overraising.
Put this term to work
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