MainMediaLeta blog: What is a liquidation preference?

Leta blog: What is a liquidation preference?

09 July 2020
In one of my recent posts, I promised to give more information about liquidation preference. As we all know, promises are meant to be kept, hence in this article, I will share details about the types of liquidation preferences, will also explain when they are used and will share several real-life examples.

One of the most important matters for investors is liquidation preference. Why? Because the liquidation preference clause determines which shareholders get priority in the case of assets distribution when the company is liquidated or sold or declares bankruptcy, which is called a “liquidity event”. Many entrepreneurs mistakenly have a negative perception of this term, however, it’s important to understand that a liquidity event includes not only bankruptcy or closing of the company but also an acquisition, merger, IPO or any other event that allows founders and other investors and shareholders to cash out some or all of their ownership stakes in the company.

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