Deal Terms
Liquidation Event
Last updated
Quick Answer
Any transaction that triggers distribution of proceeds to shareholders — including company sale, merger, or dissolution.
A liquidation event is any transaction or circumstance that triggers the distribution of company value to shareholders according to the liquidation waterfall. Common liquidation events: sale or merger of the company (most common), an IPO (sometimes defined as a liquidation event in early term sheets, but often carved out), or actual dissolution and wind-down of the company. Liquidation events trigger preferred stock liquidation preferences — investors receive their preferences before common shareholders receive anything. The definition of 'liquidation event' in a company's charter is critically important: if an IPO is defined as one, investors can choose between their liquidation preference and converting to common stock; if it's not, all preferred automatically converts at IPO.
Related Concepts
Further Reading
Understanding Liquidation Preferences: What Employees Need to Know
Liquidation preferences determine who gets paid first when a startup exits. In some scenarios, investors take everything and employees get nothing — even in a 'successful' acquisition. Here's how it works.
409A Valuations Explained: Why They Matter for Your Stock Options
The 409A valuation sets the price you pay for your stock options. Here's how it works, why early employees get a better deal, and what happens to your strike price as the company grows.
What Happens to Your Stock Options If Your Startup Gets Acquired
Acquisitions are where startup equity either pays off or evaporates. Here's how acceleration clauses, liquidation preferences, and deal structure determine whether employees see real money.
The Math Behind VC Returns: From Entry to Exit
From entry valuation to exit proceeds, this breakdown covers the full math behind VC returns — including dilution, MOIC, IRR, carry, and the metrics LPs actually use to evaluate fund performance.
How VC Exits Actually Work: IPO, M&A, and Secondary Sales
From IPOs and M&A to secondaries, here's how VC exits actually work — including cap table mechanics, lock-ups, and what drives real returns for fund managers and LPs.
Pro Rata Rights: Why They Matter and When to Exercise
Pro rata rights can make or break your fund's returns — but only if you know when to exercise them. Here's a practical framework for making smarter follow-on decisions.
Frequently Asked Questions
What is Liquidation Event in venture capital?
A liquidation event is any transaction or circumstance that triggers the distribution of company value to shareholders according to the liquidation waterfall.
Why is Liquidation Event important for startups?
Understanding Liquidation Event is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Liquidation Event fall under in VC?
Liquidation Event falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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