Liquidation Preference

Category: legal

A contractual clause that dictates the order in which shareholders are paid if a company is sold or liquidated.

Usually favored by VC investors, this clause ensures they get their initial investment back *before* common shareholders (founders/employees) see a single cent. A "1x non-participating preference" is standard; if the sale price is low, the VCs take the entire pot before anyone else is paid.

Common Examples

• The investor’s 2x liquidation preference meant that the founders received zero payout because the exit price was too low to cover the preference floor.
• Understanding your liquidation preference is the most critical part of signing a term sheet, as it directly impacts your walk-away value in a down-round.