A liquidation preference decides how the proceeds of a sale are split between investors holding preferred stock and everyone holding common stock, including founders and employees. In most exits it does not matter much. In modest ones, it can decide everything.
What is standard
In Cooley's Q1 2026 data, 98.2% of venture deals used a 1x liquidation preference and 96.4% used non-participating preferred stock.1
How the main types work
- 1x non-participating. On a sale, the investor chooses the greater of getting its money back or converting to common and taking its ownership share.
- Participating. The investor gets its money back and then also shares in what is left as if it had converted. Sometimes capped.
- Multiple (2x, 3x). The investor gets a multiple of its investment before common stockholders receive anything.
- Seniority. Later investors may be paid before earlier ones (senior), or all preferred may be paid together (pari passu).
A worked example
An investor puts in $10 million for 25% of a company. Illustrative and simplified.
| Sale price | 1x non-participating | 1x participating |
|---|---|---|
| $20 million | Investor takes $10M (better than 25% = $5M). Common gets $10M. | Investor takes $10M + 25% of $10M = $12.5M. Common gets $7.5M. |
| $100 million | Investor converts: 25% = $25M. Common gets $75M. | Investor takes $10M + 25% of $90M = $32.5M. Common gets $67.5M. |
At a strong exit, a 1x non-participating preference usually converts and stops mattering. At a modest one, it can take a large share of the proceeds. Add several rounds of preferences and the effect compounds.
What to check
- The total preference stack across every round, and its order.
- Any participation, caps or multiples.
- A waterfall model at several exit values, so founders and employees know what their common stock is worth.
This guide explains how these terms commonly work. Documents vary, and yours control. Talk to a lawyer before you sign.