A liquidation preference is the contractual right of preferred shareholders to receive a specified amount of proceeds before common shareholders upon a liquidation event, usually expressed as a multiple of original investment (e.g., 1x) plus sometimes accrued dividends. In term sheets, Liquidation Preference is a primary downside-protection lever, and Liquidation Preference structure (non-participating vs. participating, caps, seniority) can materially change founder and employee outcomes.
It is usually expressed as a percentage of the original purchase price of the preferred, such as “2x.” Thus, if the purchase price of the preferred is $5 per share, a liquidation preference of 2x will be $10 per share. Multiple liquidation preferences, for each investment series is possible.
