A common formula would be that the VC has a 2x liquidation preference. This means that the VC gets to take double their original investment out of the company before any other shareholders get their first dollar.

There is a common belief that participating preferred is always better for investors. 2x+ participating preferred: The investor get 2x on their money AND pro-rata distribution. In some cases, investors ask for a higher multiple — 3x-5x. Interest: Investors often ask for annual interest of 4–8% on their investment.

It is possible that some investors are given up to 2x or 3x liquidation preference, which means they are entitled to a multiple of their original investment (double or triple) before common stockholders get anything.

It’s the amount that your capital, or your equity, will be multiplied over the course of the projected hold time. So, if a real estate syndication deal had an equity multiple of 2x over a projected hold time of 5 years, that means that you could expect to double your money during that 5 years.

Preferred stock is typically given a dividend preference over common stock, which means that a dividend must be paid to the preferred stock before any dividend is paid to the common stock. Mandatory, cumulative requires the company to set aside and pay dividends on the preferred stock at a designated rate.

Liquidation Preferences
1x Non-Participating Liquidation Preferences With it, investors can choose to get paid before common shareholders up to the amount of their initial investment.

Pari Passu is the Latin phrase for “on equal footing.” When companies use this structure, all preferred investors have equal seniority. This means, if liquidation preferences come into play for your company, all investors share in the proceeds.

A 2X is “wow, 200% return!” A 2X in 6 years is an IRR of 12.2%. Not quite as rosy because your money was tied up a pretty long time and bore a fair amount of risk to merely double. The net after that subtraction is the true internal rate of return you earned over what you would have otherwise.)

So, now you know that an equity multiple of 2x means that you would double your money during the span of the project.

Liquidation preference determines who gets first and how much when the company is liquidated, sold, or declares bankruptcy. Liquidation preference is associated with the preferred convertible stock. It explains how the proceeds are divided and shared.

Updated Jun 25, 2019. The liquidation preference is a clause in a contract that dictates the payout order in case of a corporate liquidation. Typically, the company’s investors or preferred stockholders get their money back first, ahead of other kinds of stockholders or holders of debt, in the event that the company must be liquidated. Nov 18 2019

Participating preferred is often used as a “bridge” between a company that desires a higher valuation and a VC that believes in a lower valuation. A VC will agree to a higher valuation if it is accompanied by a participating preferred security—essentially challenging the company to earn the upside…