An investor right to get paid before common shareholders in an exit. A 1x non-participating preference means investors get their money back first. A 2x participating preference means they get 2x their investment plus a share of what's left.
Why it matters
Liquidation preferences determine who gets paid first in an exit. They can mean the difference between founders getting a payout and getting nothing, even if the company sells for millions. Understanding the math behind these preferences is critical before signing any term sheet.
How it works
A 1x non-participating preference (the most common and founder-friendly) means investors get their money back before common shareholders see anything. If an investor put in $2M with a 1x preference and the company sells for $10M, the investor gets $2M first, then the remaining $8M is split among all shareholders. Participating preferences are more aggressive. The investor gets their money back AND shares in the remaining proceeds, essentially getting paid twice. In a modest exit, participating preferences can leave founders with very little.
Learn more
Related terms
Ready to get your equity right?
Equity Matrix tracks contributions and calculates ownership automatically.
Get Started Free