Atypical liquidation preference rights on the rise
An increasing percentage of late-stage deals have atypical liquidation preference rights, according to Aumni-tracked venture transactions.
Among late-stage equity financings (series C+), there’s been uptick in the frequency of transactions with a liquidation preference multiplier of greater than 1x. The level has risen to ~13% as of June, implying investors are achieving greater protective measures in late-stage transactions. This is the highest level seen in more than 5-years.
The sharp upwards trajectory in late-stage stands in contrast to early-stage, where the prevalence of deals with atypical liquidation preferences has stabilized at around 3% over the last few months.
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For background, liquidation preferences determine the payout order and amount investors receive in a liquidation event, such as an exit, sale or bankruptcy. It stipulates, in the case where preferred shares do not convert to common upon exit, how much the fund’s initial investment will payout ahead of common shareholders, such as founders or employees. A 1x liquidation preference is considered typical in venture. In the case of a 1x liquidation preference, a fund is entitled to the amount equal to its initial investment before the remaining exit value is distributed to common shareholders. Liquidation preferences greater than 1x entitle investors to a multiple of their initial investment, ahead of common shareholders.
A rise in the prevalence of atypical liquidation rights may reflect more cautious late stage investor sentiment, with investors seeking stronger protections and returns in exchange for their participation.
Aumni will continue to monitor these trends.
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