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Venture Financing

Liquidation Preference

Who gets paid first, and how much, when a company sells

What it is

A liquidation preference decides who gets paid first, and how much, when a company is sold or wound down. Preferred investors with a "1x" preference get their money back before common shareholders (founders, employees) see anything. It protects investors when an exit is smaller than hoped.

Why it matters

In a modest exit, a stack of preferences can mean founders and employees get little or nothing while investors are made whole. It is one of the most important and most overlooked terms in a deal.

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