Liquidation Preference Simulator

Non-participating preferred gives investors a choice at exit: take their liquidation preference (e.g., 1x their investment back) OR convert to common stock and receive their pro-rata share — whichever is greater. Participating preferred gives investors both: they get their liquidation preference first AND their pro-rata share of remaining proceeds. Participating preferred is significantly more investor-friendly and can dramatically reduce founder payouts at moderate exit values.

A 1x liquidation preference means investors get their invested capital back before any proceeds are distributed to common shareholders (founders and employees). If an investor put in $5M with a 1x preference, they receive $5M off the top at exit. This is standard and considered founder-friendly. A 2x preference means they'd get $10M back first — twice their investment — before anyone else sees a dollar. Anything above 1x is aggressive and typically only seen in down rounds or distressed financings.

Liquidation preferences stack in seniority order — the most recent round typically gets paid first (senior), followed by earlier rounds, with common shareholders (founders) paid last. If a company raised $5M in Series A and $15M in Series B, both with 1x non-participating preferred, the first $20M of exit proceeds goes to investors before founders receive anything. This stacking effect is why heavily funded startups can have exits that look successful on paper but return little to founders.

Liquidation preferences stop mattering when the exit is large enough that investors' pro-rata share exceeds their preference — at that point, they convert to common stock. For non-participating preferred, this crossover happens at approximately (total liquidation preferences / investor ownership percentage). For example, if investors own 40% with $10M in preferences, exits above $25M make the preferences irrelevant because 40% of $25M ($10M) equals the preference.