LIQUIDATION PREFERENCE

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Liquidation preference is a clause included in the financing terms of a company. (partnership pact (see+)) and which concerns the how the company's assets will be distributed in the event of liquidation or sale. In general, investors who have invested in a company with a liquidation preference will receive a specific share of the company's assets before other shareholders in the event of liquidation. This gives them an advantage in terms of security of their investment, since, have a right to a share of the company's assets before other shareholders. The liquidation preference is established at the time of investment and included in the terms of the financing agreement.

Advice to entrepreneurs

Check the shareholders' agreement before forming a partnership to see if it includes a liquidation preference clause, because if you sign, you may realise years later that for example, you have 25 percent of the shares and when the company is sold for 20 million, you will only get 200,000 euros. Things about liquidation preference, that clause that seemed so innocent when you went through the notary. So it is best to have everything in writing, notarised, and well advised.

What is the What are the disadvantages for the entrepreneur of accepting and signing a liquidation preference?

THE DISADVANTAGES FOR THE ENTREPRENEUR OF SIGNING A LIQUIDATION PREFERENCE INCLUDE THE FOLLOWING:

1. Priority in liquidation: in the event of a liquidation or sale of the company, investors with liquidation preference will have priority in recovering their investment, which means that entrepreneurs may receive a much smaller amount than they expected.
2. Diluted control: by signing a liquidation preference, entrepreneurs may be giving up some control of the company to investors, as they will be entitled to a larger share of the proceeds in the event of liquidation.
3. Lower motivation: If entrepreneurs know that they will have a smaller share in the liquidation of the company, this may affect their motivation to grow the company and achieve financial success.
4. Increased complexity: liquidation preference clauses can be complicated and require a detailed understanding of the terms and conditions. This can be difficult for entrepreneurs to understand and may require legal advice.

In general, liquidation preference, can limit the potential for profitability and control of entrepreneurs in a company and should be carefully considered before being signed.