liquidation preference

Definition

A clause ensuring investors get their money back first when the company sells or dies—like having a reserved lifeboat while founders and employees fight over pool floaties. Can be 1x (reasonable) or 3x (predatory).

Example Usage

The 2x liquidation preference meant that even though the company sold for $50 million, the founders walked away with nearly nothing after investors took their cut.

Origin

Standard preferred stock term dating to early venture capital deals in the 1960s-1970s

Fun Fact

Some late-stage startups during the dot-com bubble had such stacked liquidation preferences that founders would have needed to sell for 5x the last valuation just to see a dollar.

Source: NVCA model term sheet and venture capital documentation

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