How much is a liquidation preference worth?

The key to understanding liquidation preference is the liquidation preference multiple (bolded). The text lists a “1x liquidation preference,” which means that a Series A Preferred share purchased for $1 will return $1 (because $1×1=$1). Similarly, investing $1 with a 2x liquidation preference would return $2.

What triggers a liquidation preference?

The liquidation preference can be triggered not only by the actual liquidation of the company upon dissolution or bankruptcy, but also by the sale of the company, either through stock, assets or merger with another company.

What does a 2x liquidation preference mean?

A common formula would be that the VC has a 2x liquidation preference. This means that the VC gets to take double their original investment out of the company before any other shareholders get their first dollar.

Do employees get paid when company goes into liquidation?

Liquidation occurs when a company becomes insolvent, meaning that it cannot pay its obligations when they come due.

Why is liquidation preference important?

Liquidation preferences are an important way for founders to attract investment because it can help investors protect their capital in case of an unfavorable exit. However, it can be a powerful tool that, if misused, can favor investors too heavily when multiples and participation are offered.

What is pari passu in VC?

Pari Passu is the Latin phrase for “on equal footing.” When companies use this structure, all preferred investors have equal seniority. This means, if liquidation preferences come into play for your company, all investors share in the proceeds.

Why would a company offer senior notes?

Why Do Companies Offer Convertible Senior Notes? Convertible notes and convertible senior notes are a popular way for companies to borrow money with lower interest obligations than other kinds of debt. When note-holders redeem their notes for company shares, they reduce the company’s debt obligations.

Are convertible senior notes good or bad?

Convertible notes are good for quickly closing a Seed round. They’re great for getting buy in from your first investors, especially when you have a tough time pricing your company. If you need the cash to get you to a Series A that will attract a solid lead investor at a fair price, a convertible note can help.

Who gets paid first in liquidation?

In liquidation, creditors are paid according to the rank of their claims. In descending order of priority these are: holders of fixed charges and creditors with proprietary interest in assets (first) expenses of the insolvent estate (second)