Here’s a super helpful crash course on liquidation preferences (participating and non-participating), complete with worked examples by VC Investment Manager at rampersand, Eloise Watson.
For any curious lawyer (practising in corporate or perhaps dabbling in some investing), it’s one of the best explanations I’ve come across for an otherwise complex deal mechanism.
In Eloise’s words:
"Why do investors often insist on this term? There can be many reasons but, in my experience, the most well thought through reason is that it is a type of risk levelling. It ensures that if the founders do look to have a quick exit at a lower valuation, which might still be a good outcome for the founders who will get a few million each, then the investor is at least not losing money and will be able to get their money back."