Liquidation Preference

Liquidation preference is a term used in investments, especially in startups, to determine how proceeds are distributed if a company is sold or shuts down. It ensures certain investors, like venture capitalists, get paid back their invested money (often with a set multiple) before others receive any remaining funds. For example, a 2x liquidation preference means they get twice their original investment first. This protects their investment and priority in case of a liquidation event. Essentially, it prioritizes certain investors' returns and reduces their risk if the company's valuation decreases.