A liquidation preference determines who gets paid first, and how much, when a company is sold, wound down, or has another liquidity event. It is a core economic term of preferred stock.

For founders, the liquidation preference decides how exit proceeds are split between investors and the common stock the team holds. In a modest exit, it can mean investors are made whole before the founders receive anything.

The 1x non-participating standard

The market standard is a 1x non-participating preference. The investor gets back one times their investment first, or converts to common and takes their percentage, whichever is greater, but not both. This is the founder-friendly norm in healthy early-stage rounds, and it appears throughout the NVCA model documents.

Multiples and participation

Two variations increase investor economics. A multiple, such as 2x or 3x, returns that multiple of the investment before the common sees a dollar. A participation feature lets the investor take the preference and also share in the rest. Both reduce what common shareholders receive.

How preferences stack

Preferences also stack. In multi-round companies, later investors often sit senior to earlier ones, which shapes the entire liquidation waterfall and how much reaches common stock. Understand the stack before you sign a later round. This is a general explanation, not legal advice.

See also term sheet.