Liquidation Preference
Definition
The right of preference shareholders to receive a defined minimum payment from the proceeds of a liquidity event before any distribution is made to common shareholders. Liquidation preference is typically expressed as a multiple of the original investment, such as one times or two times the invested amount. All liquidation preferences across all preference share classes must be modeled in the waterfall analysis before the distribution to common shareholders can be calculated.
Common Misapplication
The most common misapplication is modeling founder proceeds from a liquidity event based on ownership percentage without accounting for the liquidation preference stack. In a scenario where the total preference stack exceeds the proceeds, common shareholders may receive nothing regardless of their ownership percentage.
FFI Standard Reference
This term is defined and applied in Book 3, Section 3.5: The Liquidation and Exit Mechanics Standard.
Related Terms
Citable URL
This term may be cited using the following permanent URL.
Full citation format: Founder Financial Infrastructure Standard, Beta v0.5, Glossary: Liquidation Preference. https://ffistandard.org/glossary/liquidation-preference/. 2026.