Liquidation Preference
A liquidation preference is an investor's right to be paid first, up to an agreed amount, when a company is sold or wound up, before ordinary shareholders receive anything.
Why It Matters
In a modest sale, preferences can absorb most of the proceeds, which is why a high headline valuation does not always mean a good outcome for founders and staff.
Related Terms
- Term SheetA term sheet is the short document setting out the main terms of an investment: price, amount, ownership, board seats and investor protections, ahead of full legal documents.
- Cap TableA cap table is the record of who owns a company: founders, employees, investors, and the options and convertible instruments that will become shares.
- ExitAn exit is the event that turns an investor's stake into cash or listed shares: a sale of the company, a listing, or a sale of the holding to another investor.
- Down RoundA down round is a financing at a lower valuation than the previous one.
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