Liquidation Preference Stock Purchase Agreement

10. April 2021

The shares in their own right are listed in proportion to the proceeds of the liquidation with common shares after payment of the liquidation preference. The general rule is that after payment of the liquidation preference to the holders of the preferred Series A, the remaining assets are distributed on a common and equivalent basis to the holders of the preferred common shares and Series A. In these cases, there is no actual liquidation or bankruptcy of a company. In the case of venture capital contracts, the sale of the business is often considered a liquidation event. Therefore, if the business is sold profitably, the liquidation preference can also help ensure that venture capitalists are the first to claim a portion of the profits. Venture capitalists are generally reimbursed to common shareholders and to the owners and employees of the company. In many cases, the venture capital firm is also a joint shareholder. The reason for including a liquidation preference clause in a shareholders` pact is to reduce the risk of ownership (if the business is less successful than expected) or to increase the profits of the property (if the business succeeds and is ultimately sold) compared to other owners. It is a tool that venture capitalists, business angels and other professional investors use both to protect their investments and to give a higher return on a certain level of capital investment. For the professional investor, it is usually one of the most important conditions to negotiate (probably as important as the price paid) because it strongly affects downside and upside risks. Seniority Standard Seniority is the structure that most companies follow at the beginning of the phase.

In the case of standard seniority, liquidation preferences are taken into account in reverse order from last to earliest. In other words, Series B investors would get their liquidation preference before Serie A investors who would get their liquidation preference before Seed Series investors, etc. A liquidation preference is a clause in a contract that imposes the payment order in the event of a business liquidation. As a general rule, investors or preferred shareholders of the company are reimbursed first, before other types of shareholders or debtors if the business is to be liquidated. Liquidation preferences are often used in venture capital contracts, hybrid instruments, debt securities and other structured private equity transactions to determine what investors receive and the order in which they are paid at a liquidation event, such as the sale of the business. B.dem.“ If investors had benefited from 1.5 or 2.0 times the liquidation preference, they would in fact have, despite the startup`s loss of value, obtained 1.5 and 2.0 times their return, respectively. The following table shows the value of the liquidation preference for seed investors in this downward scenario. Liquidation preferences are expressed in several times the initial investment.

They are most often fixed on the 1X, which means that investors must repay all of their investment before any other shareholder. Preferences for equity-based liquidation are sometimes referred to as „Double-Dip Preferred“ and are most favourable for investors. If an investor`s preferred shares contain participatory liquidation preferences, he or she will repay his or her liquidation preference and then participate in any additional income relative to his or her property.