Fundraising & Equity
定義
A contractual right that gives preferred stockholders (investors) priority over common stockholders (founders, employees) to receive proceeds in a liquidation event such as an acquisition or wind-down.
Liquidation preference is one of the most consequential — and most frequently misunderstood — terms in a venture financing. It governs the order and amount in which investors are paid before common stockholders in any 'liquidation event,' which typically includes not just company dissolutions but also acquisitions and mergers. In a standard 1x non-participating preferred structure, investors receive back their invested capital (or 1x their investment) before any proceeds flow to common holders.
The critical variable beyond the multiple is whether the preference is 'participating' or 'non-participating.' Non-participating preferred stockholders must choose: take the liquidation preference, or convert to common and take a pro-rata share of the total proceeds. In most moderate-outcome acquisitions, non-participating preferred investors convert and share equally with common. Participating preferred stockholders, by contrast, take their liquidation preference first AND then participate pro-rata in the remaining proceeds as if they had converted — a 'double dip' that can dramatically reduce what founders and employees receive.
Consider the math: an investor puts in $5M for 20% of a company. If the company is acquired for $15M and the preference is 1x non-participating, the investor takes $5M back (the preference) or $3M (20% of $15M) — they choose the preference. If the acquisition is $50M, they choose to convert and take $10M (20% of $50M). With 1x participating preferred, they take $5M first, then receive 20% of the remaining $10M ($2M), totaling $7M — significantly more than the non-participating scenario in the $15M exit case.
Preference stacks compound over multiple rounds. Each new round of preferred stock typically has a senior preference over prior rounds. In a downside exit, this means Series C investors get paid before Series B, who get paid before Series A — and common stockholders (including founders) may receive nothing even in a nominally 'successful' acquisition.
Founders routinely sign term sheets without fully understanding how their liquidation preference stack interacts with likely exit outcomes. A $30M acquisition that looks like a win for the team may result in zero proceeds for founders and employees once a participating preferred stack is settled. Understanding this before signing — not after — is essential.
Legal counsel specializing in venture transactions can model the waterfall at different exit prices, identify which provisions are negotiable (participation rights are often negotiated out in competitive rounds), and ensure founders understand exactly what they are agreeing to. This is not a place to rely on boilerplate or standard investor documents without independent review.