Liquidity Preference

Liquidity Preference refers to the order of payments or claims made to investors or stakeholders in the event of a company’s liquidation or sale. In equity financing, liquidity preference determines which class of investors gets paid first and the amount they are entitled to.

For example, in a typical preferred stock investment, preferred shareholders may have a liquidation preference that guarantees them payment before common shareholders if the company is sold or liquidated. Understanding liquidity preference is essential for investors in venture capital or private equity deals, as it helps manage risk and aligns investor expectations with the potential outcome of a business exit.