Liquidation Preference

Dictionary Says

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.
Investopedia Says

Investopedia explains '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.

comments powered by Disqus
Hot Definitions
  1. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
  2. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  3. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  4. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  5. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  6. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
Trading Center