Liquidation Preference

A liquidation preference is a right that one class of stockholders may have to be paid ahead of other class(es) of stockholders in the case of a liquidation of the company.

For example, in most venture-backed companies, the investors have a liquidation preference that allows the investors to get their invested capital back in a liquidation event before any proceeds from the liquidation event are distributed to the holders of common stock (i.e., before any proceeds are distributed to founders, management and employees).

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Preferred Stock (like Common Stock) is a security that represents ownership in a corporation. In addition to the ownership interest, Preferred Stock has rights that Common Stock does not.