Liquidation preference

A liquidation preferenceEquity & financingLiquidation preferenceA preferred stockholder's right to be paid a stated amount — usually 1× the original issue price plus declared but unpaid dividends — before common stockholders in a sale or liquidation. Non-participating preferred takes the greater of that or its as-converted share; participating preferred takes both decides who is paid first when the company is sold — a sale is a deemed liquidation eventEquity & financingDeemed liquidation eventA merger, sale of control or sale of substantially all assets that the charter treats as a liquidation, so the liquidation preference applies to the sale proceeds under the charter. In the NVCA model, each share of preferred receives the greater of its preference (a multiple of the original issue price, plus declared but unpaid dividends) or what it would receive as converted to common. That is 1x non-participating. Participating preferredEquity & financingParticipating preferredPreferred that takes its liquidation preference and then shares in what is left alongside common as if converted, often up to a cap. Non-participating preferred takes the greater of its preference or its as-converted share, not both takes the preference and then shares in the rest as well.

At $3,000,000 the preference matters: non-participating preferred takes its $2,250,000 back, more than its as-converted $716,497.62. Above $9,420,826.77 it converts, because its share of the whole beats its money back. Participating preferred never has to choose — which is why, at $10,000,000, common gets $5,899,047.80 instead of $7,611,674.59.