Liquidation preference
Preferred members right to receive their investment back before common members in liquidation.
Definition
Liquidation preference is the right of preferred equity holders to receive their initial investment (sometimes multiplied) back before common equity holders in liquidation proceeds. Standard in VC term sheets; less common in bootstrap LLCs.
Context
Multi-class LLC Operating Agreement provision affecting waterfall on exit/dissolution.
Example
Preferred investors put in $1M with 1x liquidation preference. On a $3M sale, preferred holders get $1M back first; remaining $2M distributed to common holders (or split per Operating Agreement).
Common pitfalls
- 1x non-participating vs participating preference materially affects outcomes.
- Test waterfall provisions with example numbers before signing.