pinkandblue
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LSDefine
Simple English definitions for legal terms
liquidation preference
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A quick definition of liquidation preference:
Liquidation preference: When a company is sold or goes bankrupt, some investors may have the right to get their money back before others. This is called liquidation preference. It means that certain investors get paid first, and others may not get anything at all. It's like if you and your friend both lent money to someone, but your friend gets their money back before you do.
A more thorough explanation:
Definition: Liquidation preference is a preferred shareholder's right to receive a specified distribution before common shareholders receive anything, once the corporation is liquidated.
Example: If a company goes bankrupt and is liquidated, preferred shareholders will receive their share of the assets before common shareholders receive anything. For example, if a company has $10 million in assets and preferred shareholders are entitled to a liquidation preference of $2 million, they will receive $2 million before any of the remaining $8 million is distributed to common shareholders.
This example illustrates how liquidation preference works in practice. Preferred shareholders have a higher priority in receiving their share of the assets compared to common shareholders.