What is liquidation preference?
Liquidation preference settles the order of payout of corporate liquidation cases. It is used often in venture capital contracts to stipulate which shareholders or investors get paid first and how much they each get paid in the case of a sale of a company.
Where have you heard about liquidation preference?
If you’re involved in venture capital, you may have come across liquidation preference. It contractually stipulates which investors receive their investment money back first and how much they are guaranteed to receive. There are three main types of liquidation preferences and they are partial, full or multiple.
What you need to know about liquidation preference.
In order to determine liquidation preference, the company’s liquidator must evaluate the company’s various types of loan agreements alongside the explanation of the share capital in the company’s association. When investing in start-ups, investors often make it part of their contract that they receive liquidation preference before the other investors. A common example of liquidation preference is in reference to the repayment of creditors ahead of shareholders if the company experiences bankruptcy. Creditors with specific assets of high value will also take preference to creditors with assets of less value.