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.
Measured as
Measure Liquidation Preference with the same date, unit basis, and accounting or policy definitions used in the rest of your model.
Misused when
- 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.
Operator takeaway
- 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.
- Tie Liquidation Preference to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Quantify the impact with Liquidation Preference Calculator (1x) if you need to turn the definition into an operating assumption.
- Read Liquidation preference: who gets paid first and when investors convert if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
Where to use this on MetricKit
Calculators
- Liquidation Preference Calculator (1x): Estimate investor proceeds at exit under a simple 1x non-participating liquidation preference vs converting to common (simplified).
Guides
- Liquidation preference: who gets paid first and when investors convert: Use this guide to model exit proceeds under 1x non-participating preferred. It explains the preference-vs-conversion decision, the break-even exit value, and the cap-table details that change founder outcomes.
- Fundraising & valuation hub: pre/post-money, SAFEs, notes, and liquidation prefs: A practical hub for startup fundraising and valuation basics: pre/post-money, pro rata, option pool shuffle, SAFE/note conversion, and liquidation preference outcomes.