Liquidation Preference, Explained: 1x, 2x, Participating vs Non-Participating
Liquidation preference is the single most important term on a VC term sheet. Here's how 1x non-participating, participating, and multi-preferences change exit payouts.
Venture Capital Deal Terms & Term Sheet Guides
Deal terms determine who wins in exit scenarios and how much control investors have over company decisions. Our deal-terms guides explain the economics and governance provisions founders encounter in seed through growth rounds.
Key Deal Terms Explained
- Valuation & equity: Pre-money, post-money, and option pool sizing
- Liquidation preferences: Participating vs. non-participating, multiples
- Control rights: Board seats, protective provisions, and veto rights
- Investor rights: Pro rata, information rights, and drag-along provisions
Read venture capital deal terms explainers below.
Related Articles (15 articles)
-
-
Anti-Dilution Protection: Weighted Average vs Full Ratchet, Explained
Anti-dilution protection adjusts an investor's conversion price if the company raises at a lower valuation. Here's the math behind broad-based, narrow-based, and full ratchet.
-
409A Valuation: The Tax Number Behind Every Startup Stock Option
A 409A valuation is the IRS-required fair market value of your startup's common stock. Here's how it's computed, when to refresh, and why it matters for every option grant.