Liquidation Preference


DEFINITION of 'Liquidation Preference'

A term used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event such as the sale of the company. Liquidation preference helps protect venture capitalists from losing money by making sure they get their initial investments back before other parties. If the company is sold at a profit, liquidation preference can also help them be first in line to claim part of the profits. Venture capitalists are usually repaid before holders of common stock and before the company's original owners and employees.

BREAKING DOWN 'Liquidation Preference'

More generally, liquidation preference can also refer to the repayment of creditors (such as bondholders) before shareholders if a company goes under. The company will sell its assets, then use that money to repay senior creditors first, then junior creditors, then shareholders. Though creditors have a better chance of being repaid in the event of a liquidation, their lower risk comes with a lower reward. Creditors generally earn interest on their loans at a lower rate than the returns shareholders receive on their investments.

  1. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  2. Liquidation Value

    The total worth of a company's physical assets when it goes out ...
  3. Series A Financing

    The first round of financing undergone for a new business venture ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  5. Common Stock

    A security that represents ownership in a corporation. Holders ...
  6. Venture Capital

    Money provided by investors to startup firms and small businesses ...
Related Articles
  1. Investing Basics

    What Is Private Equity?

    This investment vehicle attracts wealthy investors to increase the value of portfolio companies.
  2. Mutual Funds & ETFs

    How To Invest In Private Equity

    Private Equity might be a pricey investment, but returns are on the rise and the payoff could be big.
  3. Investing Basics

    IPO Lock-Ups Stop Insider Selling

    Ownership plays a key role when companies go public. Find out how.
  4. Personal Finance

    Seek An Adventure In Venture Capital

    Make a career out of chasing down the "next big thing".
  5. Investing Basics

    Are ETFs the Best Way to Diversify with Bonds?

    Are bonds safe or risky right now? It depends on the type of bond and how you invest in them.
  6. Investing

    How Aliko Dangote Became the Richest African

    An overview of how Aliko Dangote turned a local commodities trading business into a billion-dollar conglomerate.
  7. Stock Analysis

    How To Start Your Own Private Equity Fund

    Here's a how-to guide on starting on starting a private equity firm.
  8. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  9. Investing News

    Austin Set to Rival Silicon Valley

    Over the years, Austin, Texas has lovingly embraced its quirky reputation with the slogan “Keep Austin Weird.” Today, the capital city is attracting several tech startups and investors, making ...
  10. Entrepreneurship

    Top 3 Most Successful African Entrepreneurs

    Discover the educational backgrounds and entrepreneurial ventures of some of the most successful and well-known African entrepreneurs.
  1. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
  2. Can mutual funds invest in private equity?

    Mutual funds can invest in private equity indirectly by buying shares of publicly listed private equity companies, such as ... Read Full Answer >>
  3. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  4. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  5. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  6. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!