# Liquidation preference

> Who is paid first in a sale: 1x non-participating versus participating, at three sale prices for Northwind.

Source: https://lopifi.com/learn/term-sheet-explained/liquidation-preference
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How does a liquidation preference work — non-participating vs participating?** Who is paid first in a sale: 1x non-participating versus participating, at three sale prices for Northwind.

A [liquidation preference](https://lopifi.com/md/glossary/liquidation-preference) decides who is paid first when the company is sold — a sale is a [deemed liquidation event](https://lopifi.com/md/glossary/deemed-liquidation-event) 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 preferred](https://lopifi.com/md/glossary/participating-preferred) takes the preference and then shares in the rest as well.

> “an amount per share of each such series of Preferred Stock equal to the greater of (i) [__ times] the applicable Original Issue Price, plus any dividends declared but unpaid thereon”

— [NVCA Model Certificate of Incorporation (Oct. 2025), §2.1](https://nvca.org/model-legal-documents/), The liquidation preference: the greater of the preference or the as-converted amount

| Sale price | Non-participating: preferred | Non-participating: common | Participating: preferred | Participating: common |
| --- | --- | --- | --- | --- |
| $3,000,000 | $2,250,000 | $750,000 | $2,429,124.41 | $570,875.59 |
| $10,000,000 | $2,388,325.41 | $7,611,674.59 | $4,100,952.20 | $5,899,047.80 |
| $40,000,000 | $9,553,301.66 | $30,446,698.34 | $11,265,928.44 | $28,734,071.56 |

Northwind's Series Seed preferred after the round: $2,250,000 invested (the SAFE's $250,000 and the new $2,000,000), 23.88% as converted. 1x preference, no dividends.

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.

*[Figure: cap table]*

After the Seed, the preferred's wedge is the SAFE's shares and the new money's together; the preference sits on top of it in a sale.

**1x non-participating**
- Pro: Investor gets its money back or its share — not both
- Pro: Common takes everything above the preference in a large sale
- Con: The investor gives up upside in a small sale
- Best for: The founder's position, and the NVCA model's default shape

**Participating**
- Pro: Investor is paid twice: the preference and a share of the rest
- Con: Common loses $1,712,626.78 even in a $40,000,000 sale here
- Con: Sets a precedent the next round will ask for
- Best for: Investors in a weak negotiating position for the company

## Where this page's rules come from

- [NVCA Model Certificate of Incorporation (Oct. 2025), §2.1](https://nvca.org/model-legal-documents/) — The liquidation preference: the greater of the preference or the as-converted amount (reference)

## Read further

- https://lopifi.com/md/accounting/liquidation-preference

- **Track:** [Cap tables & raising](https://lopifi.com/md/learn/equity)
- **Part of:** [The term sheet explained](https://lopifi.com/md/learn/term-sheet-explained) — 6 min
- **Terms taught:** [Liquidation preference](https://lopifi.com/md/glossary/liquidation-preference), [Participating preferred](https://lopifi.com/md/glossary/participating-preferred), [Deemed liquidation event](https://lopifi.com/md/glossary/deemed-liquidation-event)
- **Previous:** [The term sheet explained](https://lopifi.com/md/learn/term-sheet-explained)
- **Next:** [Anti-dilution: weighted average and full ratchet](https://lopifi.com/md/learn/term-sheet-explained/anti-dilution)
- **The course:** https://lopifi.com/md/learn