Liquidation Preference
Also called: Liq Pref · Preference Stack
A liquidation preference determines who gets paid first, and how much, when a company is sold or wound up. It typically guarantees investors the return of their investment — or a multiple of it — before ordinary shareholders receive anything.
In more detail
A 1x non-participating preference is the common market standard: the investor takes either their money back or their pro-rata share of proceeds, whichever is greater, but not both.
Participating preferences change the economics substantially. The investor takes their capital back first and then also shares in the remaining proceeds — meaning founders and employees receive materially less at most exit valuations.
Multiples above 1x, and stacked preferences across multiple rounds, compound this. At modest exit values it is entirely possible for preferences to absorb the whole outcome, leaving common shareholders with nothing despite a headline sale price that sounds successful.
An investor puts in ₹5 crore at a 1x participating preference and owns 25%. The company sells for ₹15 crore. They take ₹5 crore first, then 25% of the remaining ₹10 crore — ₹7.5 crore total, versus ₹3.75 crore under a non-participating structure.
What our lawyers check
- Whether the preference is participating or non-participating
- The multiple, and whether it exceeds the 1x market norm
- How preferences from multiple rounds stack against each other
- Modelled outcomes at realistic exit values, not just the optimistic case
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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