Liquidation Preference

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Home Startup Terms Glossary Liquidation Preference

What is Liquidation Preference?

A liquidation preference is a contract that determines in what order shareholders would be paid in the event of a liquidation. In most cases, investors and preferred stockholders receive priority, but liquidation preferences can vary. Liquidation preferences are most often used in venture capital contracts, hybrid debt instruments, promissory notes and other structured private capital transactions.

Liquidation Preference Examples

Examples of the points involved in liquidation preference:

  • Point 1. Helps ensure that investors are paid back first in the event of a liquidation
  • Point 2: Investors typically get the exact amount of funds back that have been invested, but there are scenarios where the investors wind up getting back a higher amount
  • Point 3: Within liquidation preference, a stockholder can elect for full participation, non-participating, and capped participation

Here’s another web page about liquidation preference.

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