Liquidation Preference
Investors' right to get their money back before common shareholders receive anything in an exit.
Definition
Liquidation preference determines who gets paid first and how much when a company is sold, liquidated, or goes public. The most common structure is 1x non-participating: investors get back their investment amount OR their pro-rata share of the exit proceeds, whichever is greater. In a low exit, investors take their money back first, and common holders split whatever is left. In a high exit, investors convert to common and share proportionally.
Why it matters
Liquidation preferences are the single most important term affecting your equity payout. If investors have put in $50M with 1x preferences and the company sells for $60M, investors take $50M first. Employees split only $10M. Your 1% stake is worth $100K, not $600K.
Example
Investors have invested $30M total with 1x non-participating preference. Exit at $40M: investors take $30M, employees split $10M. Exit at $200M: investors convert to common (they own 30%), getting $60M instead, and employees share the rest proportionally.