Why liquidation preference matters to a first-time founder
Liquidation preferences decide who gets paid first when the company is sold or wound up, so they can matter more than the headline valuation. If you ignore them, you may accept terms where investors take most of a modest exit and you receive little, even though you still own most of the shares. They also stack up: each new round can add another preference ahead of founders and employees.
Examples of liquidation preference
An investor put in ¥10 million with a 1x preference. You sell the company for ¥10 million. They take their ¥10 million back first. You take what is left, which is nothing, even if you still own most of the shares. If you sell for ¥100 million, they take ¥10 million and then share in the rest, or they convert and share from the start, depending on the exact term.
Common misunderstanding
Many founders assume that owning 70% of the shares means receiving 70% of the sale price. The preference is paid first. With a standard 1x non-participating preference, the investor takes either their money back or their percentage of the proceeds, whichever is higher. A participating preference pays their money back and then their percentage of what remains, which is much harsher for founders. Always check the multiple and whether it participates.
When to use it
Read it on the term sheet before you celebrate the valuation. Ask what you would personally receive if the company sold for the amount being invested, and for twice that. If the answer surprises you, the term is doing more work than the headline.