A liquidation preference is the right that gives preferred shareholders, typically investors, first claim on proceeds from a sale or liquidation, up to a set multiple of what they invested, before common shareholders see anything.
A standard 1x non-participating preference means an investor gets back at least their original investment, or converts to common stock and takes their pro-rata share instead, whichever pays more, before common holders get paid. Higher multiples (2x, 3x) or "participating" preferences, where investors get their preference and then still share in what's left, are more aggressive terms that shift more of the proceeds toward investors in a modest exit.
This is exactly why the exit price alone doesn't tell a founder what they'll actually walk away with. A $20M acquisition can look very different for the founders depending on how many liquidation preferences are stacked ahead of the common stock, which is worth reading closely on every term sheet, not just the valuation line.
Add your revenue and website for a full diligence brief, reviewed by a CPA who ran EY's West Coast R&D Tax Credit practice for 13 years.
Keep reading