Liquidation Preference

Definition

Liquidation preference defines what preferred shareholders receive at an exit before common shareholders. A common structure is 1* non-participating preferred.

Example

In a $10M exit with $5M in preference, preferred holders take $5M first, and the remainder goes to common.

How to use it

• Non-participating preferred often takes the greater of preference payout or as-converted common payout.
• Multiple classes and seniority create a waterfall that requires a full model.
• Participation rights can materially change outcomes; model both cases.

Common mistakes

• Ignoring stacked preferences and seniority across rounds.
• Confusing participating and non-participating preferred (very different outcomes).
• Using post-money ownership without modeling the preference stack.

Why this matters

This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.

Practical checklist

• Write a 1-line definition for "Liquidation Preference" that your team will use consistently.
• Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
• Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
• Use a calculator that references this term (e.g., Liquidation Preference Calculator (1x)) to sanity-check assumptions.
• Read the related guide (e.g., Liquidation preference (1* non-participating): what it means at exit) for context and common pitfalls.

Where to use this on MetricKit