What is VC Liquidation Preference? And How Can it Impact My Stock-Comp?

Liquidation preference is a benefit of the preferred stock that many VCs get when they invest in a company. There are multiple types, but in general, it specifies that the investor has a right to be paid back (typically their initial investment amount, though it can be higher) before other shareholders receive any distribution proceeds (e.g. from the sale of the company via acquisition).

In certain scenarios, VC liquidation preference can have a large impact on your stock comp. For example, let's assume all of the below funding rounds occurred for SuperCo each with a 1.0x liquidation preference:

• Seed: $2m VC investment

• Series A: $6m VC investment

• Series B: $20m VC investment

• Series C: $50m VC investment

• Series D: $175m VC investment (valued at $750 million)

• Note: Post Series D, 100 million VC preferred shares existed and 100 million common shares (and vested options/RSUs)

Scenario: SuperCo is eventually sold for $250 million.

Let's assume the Series D above occurred in 2021, after which the tech market (public and private) declined notably. SuperCo eventually had a decent exit (albeit down 66% from its prior raise), and was acquired for $250 million in cash. Post Series D, 200 million diluted shares were outstanding (100m VC preferred and 100m common).

• Without VC preference, the $250 million may have been divided 50:50 between the VCs and common holders (given they both owned 100 million shares, or half the total). Said another way, each common shareholder may have gotten $1.25 per share ($125m cash divided by 100 million common shares)

• With VC preference, the first $253 million of proceeds goes to paying back the VCs. That exceeds the $250 million cash buyout price, so 100% of the proceeds would go to VCs and common shareholders would get nothing