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Back to basics: liquidation preferences pop quiz

Charlie Banks
Charlie Banks
Last updated: June 10, 2024
Venture south fallback

Give you answers to the nearest whole dollar.

Assumptions:

I invested $500,000 to own 1/6th of a company. The company is sold after three years.

Questions:

1)      If I have a 1x liquidation preference (non-participating) and the company is sold for $10 million, how much is my payout?

2)      If I have a 2x participating liquidation preference and the company is sold for $10 million, how much is my payout?

3)      If I have a 4x liquidation preference (non-participating) and the company is sold for $1.75 million, how much is my payout?

4)      If I don’t have a liquidation preference and the company is sold for $1 million in a fire-sale, how much is my payout, and how much do the founders (who own the other 5/6ths of the company) receive from the disposal even though they lost me money?

Best of luck.