VC Liquidation Preferences
This cluster discusses liquidation preferences in venture capital deals, explaining how they work to protect investors by prioritizing their payouts in exits like acquisitions or IPOs, often at the expense of founders and employees.
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You're forgetting liquidation preference.
Yes, that is how 'liquidation preferences' work.[1] I strongly recommend reading/watching Mark Suster, who (in my opinion) does a good job at explaining investors and terms.[2][3][1] https://en.wikipedia.org/wiki/Liquidation_preference[2] http://
Don't forget liquidation preferences.
A 1x liquidation preference (meaning investors get their money back before employees and other investors “below them in the capital stack” get anything) is most common. A 1.5x preference is less common. A 2x preference is rare in VC (more common in growth equity). Anything more than that is extremely rare, and a startup that was hot at the time (meaning multiple investors were competing to invest) would likely not give investors anything more. A 5x pref is unheard of. There are other types of pr
How does a VC deal without at least a 1x liquidation preference work? The founders have taken $X from investors and control the board. What prevents them from selling the company and pocketing their share of $X? In what way is a 1X liquidation preference unfair?
No, usually investors stock is preferred with 1x liquidation preference. This means they get their money back, then the rest is split among other shareholders
Liquidation preference is the number one way that founders end up with nothing. Works like this: VC invests $1m with a, say, 5x liquidation preference then if they company sells for, say $6m the VC gets the first $5m and the remaining $1m is split according to equity. http://www.gabrielweinberg.com/ has some really, really good articles on this kind of thing.
How does liquidation preference work, when companies go IPO?
Wouldn't the VCs have had preferred stock and gotten liquidation preference before the earliest founders?
Typically investments in private technology companies include a provision called "liquidation preference" where investors get their money out before other shareholders (managers and employees) get paid on an exit.A common term is "1x liquidation preference" which is the example you give -- if I put in $1M, I get $1M out before anyone else gets paid, even if the sale valuation is less than the valuation at which I invested.Sometimes you see 2x or 3x liquidation preferenc