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Liquidation Preference

Liquidation preference is a clause in a company's financial agreements that gives certain investors, typically preferred shareholders, priority over common shareholders when a company is liquidated or sold. In the event of a liquidation, investors with liquidation preferences are entitled to receive their investment back before any distribution is made to common shareholders. Liquidation preference ensures that preferred investors recover their capital before others, which is common in venture capital and private equity deals.

Example

In a company sale, preferred shareholders with a 2x liquidation preference would receive twice their initial investment before any remaining proceeds are distributed to common shareholders.

Key points

• A clause that gives certain investors priority in receiving their investment back in case of liquidation or sale.

• Typically applies to preferred shareholders, ensuring they recover capital before common shareholders.

• Common in venture capital and private equity agreements.

Quick Answers to Curious Questions

It ensures that certain investors, usually preferred shareholders, are repaid before common shareholders in the event of a liquidation or company sale.

It provides investors with greater protection by giving them priority in recovering their capital before others.

It is common in venture capital and private equity deals, where preferred investors negotiate for priority in return for funding the company.