What is Liquidation Preference?
The right of preferred shareholders to be paid back first in a sale or wind-down, typically one times their investment, before common shareholders receive anything. It decides who gets what when a company sells for less than hoped.
$6M sale · preferred $5M first · common $1M
A liquidation preference gives preferred shareholders…
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In real work
The startup sold for $6 million, and the 1x liquidation preference returned the investors' $5 million first, leaving $1 million for common shareholders.
In the illustration
A $6M sale pours in at the top. The preferred basin, sized 1× at the $5M invested, has to fill to its brim first; only the last $1M spills over into the wide common basin below.
Model a 1x liquidation preference in your deal notebook for the cap table below: show who receives what if the company sells for $5, $20 and $80 million, with the arithmetic and each assumption you made.
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