Liquidation Preference defined: Liquidation preference is a term used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event such as the sale of the company. Liquidation preference helps protect venture capitalists from losing money by making sure they get their initial investments back before other parties. If the company is sold at a profit, liquidation preference can also help them be first in line to claim part of the profits. Venture capitalists are usually repaid before holders of common stock and before the company’s original owners and employees. Many times the liquidation preference can even be a “2x” or “3x” liquidation preference: that is, the venture capitalists first must receive 2 or 3x their original investment before all stockholders (including the VCs) in the private company start sharing the proceeds of a sale equally.
Above is a definition for “Liquidation Preference” from PrivCo’s Private Company Knowledge Bank, the definitive online and e-book guide to private companies and private company deals.
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