Liquidationsvorrang

Liquidationsvorrang, commonly translated as liquidation preference, is a term used in equity financing and corporate liquidity events to determine how proceeds are distributed when a company is sold, dissolved, or otherwise liquidated. It establishes a priority for certain shareholders, typically preferred stockholders, to recover their invested capital before common shareholders receive proceeds.

There are two main forms: non-participating and participating. In non-participating liquidation vorrang, preferred shareholders receive either a specified liquidation amount (often a multiple of invested capital, such as 1x or 2x) or the actual proceeds available to them, whichever is higher. After this priority is satisfied, any remaining funds go to common shareholders. In participating liquidation vorrang, after receiving their liquidation preference, preferred shareholders also participate pro rata with common shareholders in the remaining proceeds, potentially increasing their total payout.

Common terms include the multiplier (1x, 2x, etc.), whether participation is capped, and the seniority of preferences, which can differ across funding rounds. Some agreements have multiple layers of preferences, with newer rounds having distinct terms or being senior to earlier ones.

Example: If a company sells for 12 million and investors hold 5 million in preferred stock with a 2x non-participating preference, the investors would first receive up to 10 million (their 2x preference). The remaining 2 million would go to common shareholders. In a 2x participating arrangement, after the 10 million preference, the investors would also share the remaining 2 million with common shareholders, increasing their total.

Understanding liquidationsvorrang is important for evaluating exit scenarios, structuring cap tables, and negotiating venture financing arrangements.