Liquidation Preference refers to how proceeds are shared among a Company’s stockholders in a liquidity or liquidation event such as the sale, dissolution or winding-up of the Company. Typically, holders of debt will be paid out first followed by owners of preferred stock and whatever remains is then split across owners of common stock. There are two components to liquidation preferences for preferred stockholders: the amount of the preference and participation.
Types of liquidation preferences:
- Non-participating preferred
- Full participation preferred
- Capped participation
Liquidation preference approaches with multiple series of stock:
- Stacked preferences
- Pari passu/blended preferences