Fundraising
Liquidation Preference
Quick definition
The amount preferred shareholders get back before common holders in an exit, expressed as a multiple of their investment.
A 1x non-participating liquidation preference is standard: preferred investors get their original investment back first, then common splits the rest. A 2x preference means they get 2x their money back first, which is bad for founders. Participating preferred means investors get their preference AND share in the remaining proceeds, even worse for founders. Modeled in every term sheet exit waterfall; carefully review participation and stacking before signing.
Related fundraising terms
SAFE (Simple Agreement for Future Equity)
Convertible instrument commonly used for early-stage rounds.
409A Valuation
Independent valuation of common stock used to set option strike prices.
Cap Table
A record of all ownership interests in your company.
Pro Rata Right
An investor's right to maintain their ownership % in future rounds.
Frequently asked questions
- What is Liquidation Preference?
- A 1x non-participating liquidation preference is standard: preferred investors get their original investment back first, then common splits the rest. A 2x preference means they get 2x their money back first, which is bad for founders. Participating preferred means investors get their preference AND share in the remaining proceeds, even worse for founders. Modeled in every term sheet exit waterfall; carefully review participation and stacking before signing.
- Why is Liquidation Preference important for startups?
- Liquidation Preference is a fundraising concept that matters for startup founders because it directly affects fundraising readiness, financial decision-making, or operational discipline at the stage where mistakes are expensive to undo. Founders who understand it have a meaningfully easier time in diligence, board meetings, and investor conversations.
- What category does Liquidation Preference belong to?
- Liquidation Preference is a Fundraising term in the StartupCFO finance glossary — alongside other fundraising concepts that founders, CFOs, and accountants use in daily startup operations and reporting.
- Where can I learn more about Liquidation Preference?
- Beyond this definition, see the related fundraising terms below, or explore StartupCFO's insights and tools that put Liquidation Preference in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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