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Liquidation Stack

Posted on 12. Sep, 2008 by squareroots in Graphical Examples

Investors refer to “down-side protection” a lot in funding startups. One way investors protect themselves is with Preferred Stock, which is dependent on the Liquidation Stack. The liquidation stack refers to the order in which shareholders are paid proceeds from a sale.

Let’s look at the example shown on the right. First, let’s take the initial exit amount at $15M. In this example, everyone walks away with some money. Now, change the exit amount from $15M to $5M (just enter and hit return). First off, you may notice is that the Convertible Preferred stock is no longer converting to common. Instead, it is staying as preferred during the exit. Also the liquidation stack takes over, and you see that the last investor (VC2) walks away with all $2M of their initial investment as this was a 1x liquidation preference. The first investor (VC1) only receives $3M of their original $4M investment. Last, you’ll notice that the founders receive $0.

In this example, the seniority of the liquidation stack was on the last money-in. You can edit the exit amount and see various scenarios for what happens with the liquidation stack.

Tags: New Entrepreneurs, Students