Liquidation Preference
Candlefocus EditorIn some cases, this could mean that the preferred shareholders are paid at a higher rate than the common stakeholders or creditors. Typically the amount invested by the preferred shareholder or investors is multiplied by a predetermined figure - this is known as the 'multiplier'. For example, if an investor invests $100 in a company with a multiplier of 1.5x, that investor would receive $150 back in the event of liquidation, before a common shareholder or creditor could receive any money.
It’s important to note that any investors or preferred shareholders who receive a liquidation preference will not receive any earnings or capital gains, they will simply receive the amount they initially invested in the company, multiplied by the pre-determined multiplier.
The liquidation preference is also beneficial for debt holders or creditors, as they can be certain that any money owed to them as part of the liquidation will be repaid after the preference has been granted to the preferred shareholders.
In some cases, a company may also choose to include a 'joint liquidation preference', which allows the preferred shareholders and debt holders to collapse the two types of investments into a single preference. This joint preference means the investors and creditors are treated equally when liquidation occurs, with any money being shared equally between them in the event of the liquidation.
Overall, the liquidation preference is an important safeguard for investors and creditors when it comes to the liquidation of a company. While it's certainly favorable for investors, it also serves to ensure that creditors or debt holders receive all the money they are owed, without having to worry about the preferred shareholders receiving a higher payment in the event of liquidation.