What's The Liquidation Preference?

*Written April 15, 2021

The liquidation preference is the amount that must be paid to the preferred stockholders before distributions may be made to common stockholders. The liquidation preference becomes effective upon liquidation of the company, asset sale, merger, consolidation or any other reorganization resulting in the change of control of the startup.

It's usually expressed as a percentage of the original purchase price of the preferred, such as “2x.” Thus, if the purchase price of the preferred stock is $5 per share, a liquidation preference of 2x will be $10 per share.

Alternatively, the liquidation preference can be expressed as a per share amount, as seen in this generic liquidation preference clause:

The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $10 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such share for each share of Series A Preferred Stock then held by them.