What Liquidation Preference means
Liquidation Preference generally refers to a right that determines which equity holders receive proceeds first in a sale, liquidation, or other defined event. The exact effect depends on the document, governing law, facts, and defined terms.
Business example
Preferred investors may be entitled to receive a stated amount before remaining proceeds are distributed to common holders, subject to the exact charter terms.
Do not confuse it with
Liquidation preference is a distribution priority. It is separate from valuation, anti-dilution adjustment, dividends, and voting rights.
What to check in the file
- Identify the preference amount or multiple.
- Determine whether the preference is participating or nonparticipating.
- Check seniority among financing rounds.
- Model conversion choices and several exit values.
Sources to verify
Start with the linked authority, then check the governing document and the current agency, court, or state source that applies to the situation.
Before sharing records
- Keep originals in a controlled file and review a clearly dated working copy.
- Redact sensitive data unless the recipient is authorized and needs it.
- Label each document with its date, parties, version, jurisdiction, and status.
- Ask one focused question and identify the desired business outcome.