Deal Terms
Liquidation Overhang
When accumulated liquidation preferences exceed the company's realistic exit value, making common shares effectively worthless.
Liquidation overhang occurs when a company has raised so much preferred capital with liquidation preferences that, at realistic exit valuations, there's little or nothing left for common shareholders after preferred investors are paid. This creates a toxic dynamic where the team working to build value holds equity that's economically worthless, destroying motivation and alignment.
In Practice
After raising $150M across five rounds with 1x liquidation preferences, the company would need to exit above $150M before common shareholders saw a penny — but the business was only worth $100M.
Why It Matters
Liquidation overhang is one of the most destructive dynamics in venture capital. It creates a dead zone where the company is worth something but the people building it own nothing. It often leads to recapitalizations or management carve-outs.
VC Beast Take
Liquidation overhang is the silent killer of startups. The company looks alive from the outside but is zombie economics on the inside.
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