Raising money
Liquidation preference
A liquidation preference is an investor's right to get their money back before founders and employees are paid anything when the company is sold or shut down.
Also called liq pref
It decides who is paid first at a sale, and how much each investor takes before anyone else is paid. If their shares are participating, they also take a share of what is left. If not, they choose between their money back and an ordinary share of the sale.
This is not legal or tax advice, check with a lawyer or accountant.
When this shows up
Example, not a real founder: your company is bought for an amount that sounds large. After the investors' preferences are paid first, much less is left for common shareholders, meaning you and your team.
What to do next
Add up the preferences across all your investors and compare that total with a sale price you would realistically accept. The gap is what is left for common shareholders, minus any share that participating investors also take.
Go deeper
Participating preferred with a 1x cap, and what it costs you
Each clause it finds explained in plain words, with the ones that may be worth raising with a lawyer pointed out.
Read the guide