Article · 10 min read

Liquidation Preference

AngelList Education Center · AngelList Free Intermediate

This is the term sheet clause that decides who gets the leftover cash first when you shut down, and this guide walks the exact payout waterfall: 1x preference off the top, then participating vs non-participating deciding whether investors double-dip or convert to common, then pro rata to everyone else. It uses a concrete $3M-into-$5M example, so you can see whose money is left after liabilities and where a liquidation preference reorders it versus a clean pro-rata split by ownership.

• Preferred investors get paid before common holders, so remaining cash is not always split pro rata by ownership; the preference reorders it
• A 1x non-participating preference (the most common) means an investor takes either their money back or their pro-rata share, whichever is larger, never both
• Participating preferences let investors take their preference AND share the rest, which shrinks what founders and common holders see on a small residual