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Entrepreneurship & Startups vocabulary · Equity & Valuation

Liquidation preference

Meaning in entrepreneurship & startups, with examples

nounAdvanced term

In entrepreneurship & startups, liquidation preference means: A term that gives investors the right to get their money back, or a multiple of it, before other shareholders when the company is sold or closed.

In Turkish: tasfiye önceliği, tasfiye tercih hakkı

How it is used

Common in venture deals with preferred shares. A 1x non-participating preference, where investors get either their money back or their share of the sale, whichever is higher, is widely seen as standard. Higher multiples or participating preferences favour investors and should be read carefully.

Example sentences

  1. With a 1x liquidation preference, the fund gets its 5 million back first if we sell the company.

  2. The founders received almost nothing from the sale because of a 3x liquidation preference.

Common collocations

  • 1x liquidation preference
  • non-participating preference
  • participating preferred
  • liquidation stack
  • term sheetA short document that lists the main terms of a proposed investment, such as the amount, valuation and investor rights, before the final legal contracts are written.
  • exitThe way founders and investors turn their shares into cash, usually when the company is sold to another company or lists its shares on a stock exchange.
  • shareholders' agreementA contract between the owners of a company that sets out their rights and duties, such as voting, selling shares, board seats and investor protections.
  • down roundA funding round in which a company is valued lower than in its previous round, so new shares are sold at a lower price than before.

More terms: Equity & Valuation

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