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Define liquidity preference clause in the term sheet
• Comes into play when a liquidity event takes place such as M&A.
• Preferred stock gets priority over common stocks on getting a specific amount of money back
• Exit value is based on multiples and is common to see 1x 2x and 3x in the term sheet for money invested through preferred stocks.
• Preference dividend are also included if part of the term sheet.
Preference overhang is the amount of money that preference share will first receive after which the remaining of the liquidation proceeds will then be allocated to the common stock holders.
• Preferred shareholders will always look to convert their shares to common shares if the conversion works out economically favourable.
Three types of preference shares:
• Non-Participating preference shares: First pay the original purchase price of preference shares post which money will be distributed to common shareholders.
• Participating preferred stock with cap: First receives the original purchase price after which pref shareholders participates with common stockholders on a as converted basis until the pref holders receive (2x) the original investment.
• Participating preference stock: First receives the original purchase price after which pref shareholders participates with common stockholders on a as converted basis.
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