LIQUIDATION PREFERENCE PLUS

That way they actually know how much their equity would be worth in various outcomes. What it all boils down to is that startup employees should make sure they know exactly what kind of liquidation preferences their company's preferred stockholders own. If they were only holding options, they would be underwater and worthless. So the VC gets $25 million and the employees' portion is worth $5 million, which means the value of their shares went down, so they will have lost money if they had exercised their options and bought shares in the beginning. It sets forth the order of return to the investors triggered by certain events such as a liquidation, dissolution, merger, acquisition or sale of all, or substantially all, of its assets.

LIQUIDATION PREFERENCE PLUS

If the company only rises in value from $20 million to $30 million, the VCs will get all of the first $20 million, plus half of the next $10 million. What is liquidation preference A liquidation preference gives the preferred stock the right to get paid before the common stock. But its not all bad news, liquidation is wider than. It is worse if the company does not do so well. A liquidation preference is, as you might expect, related to what happens when a company is wound up. Meanwhile, the employees only saw a doubling of the value of their shares, despite the company's value tripling. So the VC quadrupled their investment despite the company's value only tripling. In this example the VC would get $40 million and the employees get $20 million. Therefore the VC will get every dollar up to $20 million and will split the remaining $40 million with the employees. 2x their original investment.) Only after that $20 million is paid out, do the remaining proceeds get split 50/50. So the founder team gets 20 million, rather than the 24. Step 2: Share out the remaining proceeds among the ords.

However, the VC has a 2x liquidation preference, so the first $20 million goes to the VC (i.e. If the investor in our example had a liquidation preference that would pay out twice the amount invested (a 2x preference ) then the waterfall on the 30 million sale would be: - Step 1: Pay the prefs 10,000,000 and. So, you would think that the employees would get half of that, i.e. So, if our example company is worth $20 million at the time of the VC investment, and then triples in value, the company is worth $60 million. This means that the VC gets to take double their original investment out of the company before any other shareholders get their first dollar.

A common formula would be that the VC has a 2x liquidation preference. This is where the term 'liquidation preference' comes in.

Liquidation preference