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by Undo Capital
December 15, 2025
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What Is Liquidation Preference?

Liquidation preference is an investor protection mechanism that determines the order and amount shareholders receive if a company is sold, wound up or undergoes another liquidity event.

Liquidation Preference Meaning

The liquidation preference meaning centres on ensuring investors recover their capital, sometimes with a multiple, before ordinary shareholders receive proceeds. A typical liquidation preference definition includes whether the preference is non-participating (investors either take their preference amount or convert to ordinary shares) or participating (investors take their preference, then share in the remaining proceeds). Preferences can significantly influence founder and investor outcomes in acquisitions or down exits.

Liquidation preference stands for risk mitigation in venture deals, shaping negotiations and valuations. 

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Disclaimer: Our services are designed to assist startups and businesses with company formation, legal agreements, and funding-related documentation. We do not provide investment advice, financial advice, or tax advice, nor are we regulated by the Financial Conduct Authority (FCA). Participating in startups and early-stage enterprises carries inherent risks, including limited liquidity, absence of dividends, potential loss of investment, and dilution. Any decisions regarding investments should be made independently by the investor as part of a well-diversified portfolio.