![]() What about the rest of the proceeds? After the Preferred Shares have received their preferential payment, the remaining proceeds will be distributed pro rata (in plain English, proportionally) to holders of Common and/or Preferred Stock, depending on the terms. Unicornzzz is acquired for $15M, and Cool Ventures gets $10M before any of the proceeds are paid out to the common shares (founders and employees). Let’s say that Cool Ventures (the VC) invested $5M with 2x liquidation preference into Unicornzzz, Inc. Similarly, investing $1 with a 2x liquidation preference would return $2. The text lists a “1x liquidation preference,” which means that a Series A Preferred share purchased for $1 will return $1 (because $1x1=$1). The key to understanding liquidation preference is the liquidation preference multiple (bolded). ![]() “First pay times the Original Purchase Price on each share of Series A Preferred.” Let’s take a look at a sample liquidation preference term in the National Venture Capital Association’s model term sheet: The specific terms are first negotiated in the term sheet, then enshrined in the amended charter. Liquidation preference refers to the right to receive a chunk of the proceeds from the liquidity event first, before any of the common shareholders. Liquidation preference: I call first dibs! The proceeds are distributed in two steps: liquidation preference and participation. ![]() Let’s dive into the details of who gets paid how much after a liquidity event (in our case an acquisition). If a startup is liquidated for less than the investors invested, then their liquidation preference would allow them to get money while the common shareholders get nothing. Liquidation preference gives preferred shares the right to be paid out first following a liquidation event (e.g., an acquisition or IPO), which is one of the reasons that investors want these preferred shares as opposed to the common stock that founders and employees typically receive. Congratulations! Once the champagne stops flowing, you might begin to wonder: exactly who gets how much? Let’s talk about the allocation of proceeds from your exit: the liquidation preferences. Let’s say your company is acquired for $1B.
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