In the last post, we touched upon liquidation preference. In this post, we will discuss some of the examples and nuances.

For example, an investor owns 50% of a company after an investment of $10M.

Scenario 1: The company gets sold for $50M. In this case, the investor can take $25M (50% of the business) or $10M as per the liquidation preference. Clearly, the investor will take the $25M.

Scenario 2: The company gets sold for $15M. In this case, the investor will get $10M leaving $5M for others.

Till now these scenarios were in the case of 1x non-participation preference. This means that the investor gets the option to take only the max of 1x the invested dollars or the amount she’s entitled to based on the ownership in the company.

Instead of 1x, we can also have 2x non-participation preference. So in scenario 1, the investor will still take $50M (as it is greater than $20M). In scenario 2, the investor gets to take $15M leaving nothing for others.

This shows the impact of a liquidation preference on the preferred. In the next post, we will look at participating preferred.