Back to basics: what is a liquidation event?

On the previous post, we said the “preference” is relevant at a “liquidation event.” What does that mean?

A liquidation event covers various scenarios through which the shareholders in a company get “paid out.” It covers both good situations and bad.

Good:

1)      Sale of a company for cash. Angels invest in private companies whose shares not “public” (so they cannot easily be sold). The only exception is when another company (or investor) buys (all the existing shares of) the company.  The “liquidation event” is a cash payment from the buyer to the selling shareholders (us). This is our goal, and what happened in Sabal Medical, The Iron Yard Academies, Verdeeco, and our other “exits.”

2)      Sale of a company for shares. Like (1) above, except this time the buyer is offering publicly-traded shares. The liquidation event is the “swapping” of shares in our company for shares in the acquiring company. This happened when Selah Genomics was acquired by EKF Diagnostics.

3)      IPO of a company. An Initial Public Offering (IPO) is where a company sells shares on a public market (like the New York Stock Exchange), and converts its existing shares into publicly traded shares. This is rare for southeastern early stage companies, though we have at least one portfolio company that is planning to IPO soon.

Bad:

1)      Less good is the most obvious “liquidation” –quickly disposing of any assets of the company, or simply closing it down. A significant minority of angel investments face this form of liquidation – though thankfully few of our portfolio companies so far.

So when does the "preference" matter?

The “preference” in preferred shares is most important in the situations labeled (1) above. Preferred shareholders receive whatever proceeds come from the liquidation before the common shareholders receive anything.