Liquidation Preferences

Liquidation preferences determine how proceeds are distributed to investors when a company is sold, merged, or shuts down. They specify the order and amount investors receive before any remaining funds are shared among shareholders. For example, a 1x liquidation preference means investors get back their original investment first; a 2x preference means they get twice their initial amount before others get paid. This protects investors by ensuring they recover their investment, especially if the company's value at liquidation is less than expected. Preferences can be senior (paid first) or participate (allowing further distribution after initial repayment).