A liquidation preference is an investor right that guarantees the return of investor capital before any distributions are made to common shareholders. It typically applies in every liquidation scenario except an IPO. Liquidation preferences are typically set at one times capital invested, but they can go as high as two times, three times, or more in situations where the founder is really desperate.
After the market correction in the tech sector in the early 2000’s we saw companies that were desperate for money taking cash from “vulture” capitalists who structured deals with liquidation preferences of up to 10x, effectively wiping out the interests of previous investors by using these to capture so much of the upside for themselves. It was a difficult period, but as they say, the best time to invest is when there is proverbial “blood on the streets”. And investors with cash saw this during that time period.Read More