Liquid Pref

Liquidation Preference (or Liquid Pref) is a common clause in financing agreements between investors and start-ups, especially in venture capital fundraising. It determines the order and conditions under which investors recover their investment in the event of the liquidation of the company, that is, when the company is sold, dissolved, or in another situation where it ceases to operate.

In general, a liquidation preference grants preferential investors the right to recover their initial investment (or a multiple of it) before other shareholders, such as founders or employees, can collect funds. For example, if an investor benefits from a “1x preferential liquidation”, they will receive their initial investment before other shareholders are paid, even if the common shareholders own a larger portion of the business.

Liquidation preference thus protects investors by reducing their risk in the event of an unfavorable outcome, but it can also limit the gains of founders and employees by diluting their share upon exit.

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