Sample liquidation preference clause in a typical venture capital term sheet

Andy Lau has substantial experience representing pe/vc funds, investment banks and startup and growth companies in pe/vc investments, M&A, IPO and capital markets transactions. For a preliminary consultation, please email him at andy@askventure.com.

I get asked a lot for a sample clause on liquidation preference used in a typical venture capital term sheet. So, I’ve put together an all-in-one sample clause here for your reference. The good thing about this sample clause is that it covers or can be modified to cover the scenarios of

(1) participating preferred with a cap,

(2) participating preferred without a cap, and

(3) non-participating preferred. 

Just pay attention to the wordings in square brackets.

Here you go. 

In the event of any Liquidation Event (as defined below), the holders of the Series [A] Shares would be entitled to receive in preference to the holders of the Common Shares a per share amount equal to [1.5x] the Purchase Price and any declared but unpaid dividends (together, the “Preference Amount”), proportionately adjusted for share splits, share dividends, recapitalizations and the like.  

After the Preference Amount has been paid on all Series [A] Shares, any remaining assets of the Company or proceeds received by the Company or its Shareholders shall be distributed to the holders of Common Shares and the Series [A] Shares pro rata on an as-converted basis [until the holders of the Series [A] Shares have received an aggregate of [4.0x] times the Purchase Price per share (plus any declared and unpaid dividends included in the Preference Amount).

Thereafter, the remaining assets of the Company or proceeds received by the Company or its Shareholders shall be distributed ratably to the holders of Common Shares.]

A “Liquidation Event” shall include a liquidation, winding-up or dissolution of the Company, or at the election of the Investors, a merger, acquisition or sale of voting control of the Company in which its shareholders do not retain a majority of the voting power in the surviving entity, a sale of all or substantially all of the Company’s assets or the exclusive licensing of substantially all of the Company’s intellectual property.

Related posts:

1. How to Calculate Liquidation Preference of Preferred Stock in a Venture Capital Financing?
2. Participating vs non-participating preferred stock in liquidation preference
3. What is right of first refusal (ROFR) in a venture capital (vc) financing?
4. What is pre-emptive right in a venture capital / private equity (vc/pe) investment?
5. Download Sample Share Cap Table Template of a Venture Capital Term Sheet

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