What does liquidation preference mean?

Liquidation preference provides the investor the priority to receive the investment amount and other assets in case of a liquidation event. Hence, the investor gets its invested dollars back first — before other stockholders (including employees’ options) — in such an event.

What is a Liquidation Event?

While the definition varies, usually the following conditions can result in a liquidation event

⇨ Bankruptcy or liquidation by the company

⇨ Sale of substantial assets of the company

⇨ Restructuring of the company or change in control because of which the investors become minority shareholders.

If the restructuring or sale happens with prior consent, it might be excluded from liquidation events.

In the next post, we will discuss the various varieties of liquidation preferences.