Πράγματα που πρέπει να γνωρίζετε για τις προτιμήσεις εκκαθάρισης

Aside from valuation, one term that can have a significant impact on an early investor’s overall returns is the liquidation preference. In this post, we aim to explain what liquidation preferences are, why they matter so much, different types, and how they can impact an investor’s (or employee’s) overall returns.

What are liquidation preferences?

Liquidation preference determines the payout order or amount of money that must be returned to investors who hold preferred shares before a company’s common shareholders can receive returns in the case of a liquidation event. A liquidation event can include the sale of the company, a merger, or liquidation due to dissolution or bankruptcy. Liquidation preferences δεν ισχύουν to common shareholders.

Γιατί έχουν σημασία;

Liquidation preferences are designed to protect early investors in the case of a liquidity event, particularly at a lower value than anticipated. Note that if a company exits through an initial public offering (IPO), it is typical for preferred shares to be converted to common shares and preferred stockholders would not be entitled to a payout.

Liquidation preference features and variations

There are four primary variations to consider when it comes to liquidation preferences: participating or non-participating, the multiple, the cap, and seniority structure.

Participating or non-participating

Participating liquidation preference provides for preferential payment, usually of the initial investment plus additional proceeds proportionate to an investor’s equity ownership in the company. Non-participating preferred stockholders can choose between receiving their liquidation preference or share in the proceeds in proportion to their equity ownership. If they choose the latter, they must first convert their preferred shares to and take on any risk inherent of ownership in, common stock.

Πολλαπλούς

Liquidation preferences are expressed as a multiple of initial investment, typically between 1-2X. A 1X liquidity preference multiple provides for the return of the original investment amount before common shareholders receive anything. A 2X multiple provides for double an initial investment, a 3X triple, etc.

το καπάκι

When liquidation preference is capped, it means that there is a predetermined limit on the amount of capital that can be committed to preferred stockholders. Participating preferred shareholders must convert their shares to common shares to receive any funds over the predetermined cap.

Seniority structure

Investor seniority is another feature that can impact how investors’ returns are paid out. Three common payout structures are standard seniority, pari passu, and tiered seniority.

• Αρχικό: Payouts occur in order of the latest round of funding to the earliest round. An investor who invested in a company’s Series C round would receive their payout before investors who invested in the Series A round. While this may seem counterintuitive, the reasoning lies in that earlier stage investors rely on capital infusion from subsequent investors to keep the company going.
• Pari passu: Preferred shareholders across all funding rounds have equal status and priority in the event of a liquidation. Investors in this category each receive a piece equal to their pro-rata share if funds are available.
• Δέσμευσε: With a tiered structure, investors are grouped into tiered levels of seniority at the discretion of the issuing company. At each tier, investor payouts follow the pari passu structure.

Liquidation preferences and impact on potential returns

Now, let’s walk through a few different liquidation preferences to see how they play out in a very simplified scenario. Imagine that an investor invests $1 million into a company (25% of the company), all preferred stockholders have a 1X multiple, and then the company is sold in a cash-only transaction. Assuming that the company receives $5 million in net proceeds after the acquisition:

• Participating with 1X multiple: Under this scenario, the investor would get their $1 million investment back in addition to 25% of the net proceeds remaining after all stockholders with liquidation preferences are paid their initial investment amount.
• Non-Participating with 1X multiple: Investors with a non-participating liquidation preference generally exit the investment in one of two ways. The investor could receive their initial $1 million back without any additional proceeds. Alternatively, the investor’s non-participating preferred stock may be converted into common shares, thereby participating in potential upside but forgoing the lower-risk return of principal.
• Participating 1X multiple with 2X cap: Preferred stockholders would be entitled to their initial investment of $1 million plus net proceeds remaining after all stockholders with liquidation preferences are paid their initial investment amount, with the aggregate payout capped at an amount equal to $2 million. In this case, 25% plus the initial investment would equal $2.25 million, but the investor would receive $2 million.

The example above assumes that the liquidation event is, as a whole, a positive for all investors. It’s important to remember that the terms and dollar amount of the deal will ultimately dictate payout. Depending on preference, some preferred stockholders may realize a profit, some may only receive their initial investment, and some may realize a loss.

There is a lot of flexibility in how liquidation preferences are structured. As an investor, always make sure you fully understand the terms and your position on the cap table before making any commitments.

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Οι πληροφορίες που παρουσιάζονται εδώ προορίζονται μόνο για γενικούς ενημερωτικούς σκοπούς και δεν προορίζονται, ούτε θα πρέπει να ερμηνευθούν ή να χρησιμοποιηθούν ως, πλήρη έγγραφα τεκμηρίωσης για οποιαδήποτε ασφάλεια, επένδυση, φορολογική ή νομική συμβουλή, σύσταση ή προσφορά πώλησης ή ζήτηση προσφοράς αγοράς, ενδιαφέροντος, άμεσα ή έμμεσα, σε οποιαδήποτε εταιρεία. Η επένδυση τόσο σε εταιρείες πρώιμου όσο και σε μεταγενέστερο στάδιο ενέχει υψηλό βαθμό κινδύνου. Είναι δυνατή η απώλεια ολόκληρης της επένδυσης ενός επενδυτή και δεν μπορεί να πραγματοποιηθεί κέρδος. Οι επενδυτές πρέπει να γνωρίζουν ότι αυτοί οι τύποι επενδύσεων είναι ρευστοποιήσιμοι και πρέπει να προβλέπουν την κατοχή έως ότου πραγματοποιηθεί έξοδος.

Source: https://microventures.com/things-to-know-liquidation-preferences?utm_source=rss&utm_medium=rss&utm_campaign=things-to-know-liquidation-preferences