Everything You Wanted to Know About VC Liquidation Preference But Were Afraid to Ask
Venture capital investors almost always insist on investing through a “preferred” equity instrument, typically referred to as preferred stock. Preferred stock is better than common stock, because holders of preferred stock receive preferential treatment in the event of a liquidation of the business. For these purposes, a liquidation event can be either a bankruptcy, a dissolution or a sale of the business.
Typically, a liquidation preference is designed to protect an investor’s monetary investment in a situation where, for whatever reason, the proceeds of a liquidation to be distributed to all investors are less than the amount of the investors’ original investment. This is done by distributing proceeds first to the holders of preferred stock and then to all other shareholders.
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Head of New York Business & Finance Group, Cooley LLP