Valuation and returns
Liquidation preference calculator
At a modest exit, the preference terms decide more than the ownership percentages. This shows the payout for one preferred investor.
One class of preferred, no cap on participation, no dividends. Multiple classes and seniority need a full waterfall.
How it works
A liquidation preference lets preferred investors take their money back (times a multiple) before common holders. With a non-participating preference, the investor takes the larger of the preference or its share as if converted.
With a participating preference, the investor takes the preference and then shares in what is left as well. That can move a large part of a mid-sized exit away from founders and employees.
The formula
- Preference amountInvested x multiple, limited to the exit value.
- Non-participatingInvestor takes the larger of the preference and ownership x exit.
- ParticipatingPreference + ownership x (exit - preference).
Worked example
A $10 million investment with a 1x non-participating preference and 25% ownership, in a $30 million exit: 25% would be $7.5 million, less than the $10 million preference, so the investor takes $10 million and $20 million remains. With participation, the investor would take $15 million.
Put the numbers in your data room
Keep a one-page summary of the preference stack, every class with its multiple, seniority and participation, next to the charter in the data room. Later investors and buyers read it first.
Liquidation preference calculator FAQ
What is a 1x non-participating preference?
The investor gets the money back first or converts to common, whichever is more. It is the most common term in venture deals.
When does participation matter?
In exits that are not far above the money invested. In very large exits the difference becomes small.
What is seniority?
The order in which classes of preferred are paid. Senior classes are paid before junior ones; pari passu classes share pro rata.