A liquidation preference decides who gets paid first, and how much, when the company is sold or wound down. Investors with a preference get their money back before common shareholders like founders and employees.
Example
An investor puts in $2M with a 1x non-participating preference and owns 20%. If the company sells for $5M, they choose the larger of $2M back or 20% of $5M ($1M), so they take $2M. If it sells for $50M, they take 20%, which is $10M.
Why it matters for early-stage founders
In a modest exit, the preference can decide whether founders walk away with anything. The standard at early stage is 1x non-participating; anything above that changes the outcome a lot.
The common mistake
Ignoring "participating" or multiples above 1x. A participating preference lets the investor take their money back and then also share in what is left, which cuts what founders receive in every exit.
Know which terms investors will check
Get your business ready for investor questions before you negotiate terms.
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