Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process. In this series we’ll look to shed some light on the legal language contained in a financing term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both the Company and the Investor. Check out an overview here.
Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at firstname.lastname@example.org.
If dividends are the interest paid on a standard loan, then the “liquidation preference” is the return of principal. Together they form the economic spine of the stock (or other securities) sold to the Investor, and, as such, should be the primary focal point of negotiations related to the Company’s value.
Put simply, a “liquidation preference” is an amount of money which the Company agrees to pay to the holders of its preferred stock (or other securities being sold) prior to (or in “preference”) to all other funds it is to pay its other stockholders upon the Company’s sale (or “liquidation”).
Unlike in a standard bank loan, however, a “liquidation preference” can take many forms, some much more costly than others.
Continue reading “Financing Term Sheet Deep Dive: Liquidation Preference”