The investor’s field guide · L
Liquidation preference
A contractual priority determining how certain shareholders receive proceeds before other holders in specified exit or winding-up events.
Explained by the editorial team
A liquidation preference gives a class of shares priority in distributing proceeds on events defined in the documents. Those events may include a company sale as well as a winding-up. The preference affects distribution among shareholders; it does not normally put equity ahead of creditors.
A worked example
With a simple one-times non-participating preference, an investor may receive the agreed preference amount or convert to ordinary shares if that produces more. A participating structure can work differently. Exact outcomes depend on available proceeds and the contract.
What to examine
Model several sale values, including disappointing ones. Check participation, caps, seniority between funding rounds and whether accrued amounts increase the preference. A company can sell for a positive headline price while little or nothing reaches ordinary shareholders. Ownership percentages alone therefore do not describe the economic bargain. Legal terminology varies between UK and US documents, so have the relevant provisions explained in the context of the entire capital structure.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.