Stockholders Elect With Receive Their Liquidation Preference
Description
How to fill out Voting Agreement Among Stockholders To Elect Directors?
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FAQ
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.
A 1x liquidation preference means the investors get back the invested capital before the founders get their share. With a multiple liquidation preference (2x, 3x etc.), the investors get a multiple of their investment before the founders get paid.
Let's say a VC invested USD 2m in your startup with a 2x liquidation preference. This means that in the event of a liquidation or sale of the company, the VC is entitled to receive two times its initial investment of USD 2m before any other shareholders receive anything.
An investor with a 2x liquidation preference gets paid back double their original investment amount before any shareholders lower in the preference stack receive anything.
Liquidation preference is calculated by subtracting retained earnings from total equity. Therefore, one can get the receipts as other shareholders share them.