If you work in the tech industry, you’ve undoubtedly heard the term “liquidation preference” at some point. You may have experienced a chill as the words fell upon your ears, too. There’s a non-medical reason for this: liquidation preferences are created to ensure that investors get paid before anyone at a startup when the company either sells or else goes out of business. In short, they’re good for investors and less good for founders, employees, or even earlier investors.
Let’s walk through the basics.
Broadly, a liquidation preference determines who gets what when a company is liquidated. This can mean when a company is merged or when it’s sold or when there’s a change of control of the company or when there’s a wind-down.
In all of of these scenarios,…