A liquidation preference entitles holders of a class of stock to receive the assets of a liquidated company before holders of other classes of stock (usually the earlier investors and the founders) receive anything.
The preference is generally calculated as a multiple of the original investment, often the term provides that the original investors receive 1x (their original investment), but in the pre-Internet bubble era, investors sometimes received a preference as high as 10x.
That means they would take the first mm (3 times their original mm investment) of assets before holders of common stock (the founders) received anything.
Since there’s only mm in assets, Series A get all mm, and the common stock holders get nothing.
Example #1 The company hits hard times and is forced to be sold for mm.
Scenario 1: Series A has a 3x preference, and is not participating Scenario 2: Series A has a 1x preference, a 1-1 conversion ratio, and is fully participating In this example, under the first scenario the Series A investors have a 3x preference.
The 4x participation includes the 2x preference – that is, the investor does not get a combined 6x return.
(3) – if the series of stock is not participating, shareholders of that stock will be entitled to their preference, but will not participate in the further distribution of assets.
terms instruct how the remaining assets are to be divided after the preference is allocated.
This briefing addresses the usual manner in which solvent voluntary liquidations proceed under the BVI Business Companies Act 2004, as amended (the "Act").
The observations that follow are subject to the particular provisions of the Memorandum and Articles of Association of any company seeking a voluntary liquidation and we recommend that these are always reviewed in the first instance.
In the second scenario the Series A holders receive their original investment, mm and then participate in the distribution of the remaining mm of assets on an as converted basis.
They would get 27% of the remaining mm, giving them about another mm or mm altogether.