The next question is “how much preference” do preferred equity shareholders usually get?
The basic answer is “a one x liquidation preference” – or 1x.
What does that mean?
Liquidation preferences are phrased as multiples of the amount invested. So 1x means one times the amount invested by the angels.
If we invest $500,000 in a company and have a 1x liquidation preference, then at a liquidation event we get 1x our investment – $500,000 – before the common shareholders receive anything. So if the company is sold for less than $500,000, we take all the proceeds.
Does that vary?
Yes. Most deals have a 1x liquidation preference, but we have portfolio companies that have raised capital with many different preferences – in one case as high as a 4x preference. A higher liquidation preference can attract capital when it is needed.