Liquidation Preference

A liquidation preference determines the order and amount of distributions when a company is sold, merged, or liquidated. Preferred stockholders (investors) receive their preference before common stockholders (founders, employees) receive anything. Standard is 1x non-participating: investors get their investment back, then remaining proceeds go to common shareholders. Participating preferred is more aggressive: investors get their preference AND continue to participate in remaining proceeds as if converted to common — effectively double-dipping. In a strong market, 1x non-participating is the norm. In down markets or distressed situations, investors may negotiate higher multiples (2x, 3x) or participation rights. Liquidation preferences only matter in modest exits — in large exits, investors almost always convert to common to capture proportional upside.