When it comes to investments in companies, shareholders often have different preferences when it comes to how they will be compensated in the event of a liquidation or sale. This is where a liquidation preference shareholder agreement comes into play.
A liquidation preference shareholder agreement outlines the order in which shareholders will be paid out in the event of a liquidation or sale. This agreement is a legally binding document that is signed by shareholders and the company, and it typically includes information on the following:
1. Liquidation preferences: This refers to the order in which shareholders will be paid out in the event of a liquidation. Typically, preferred shareholders will be paid out first before common shareholders.
2. Participating vs. non-participating: Shareholders may also have different preferences when it comes to participating in the liquidation. Participating shares will receive a percentage of the proceeds above their initial investment, while non-participating shares will only receive their initial investment.
3. Conversion rights: Some shareholders may have the right to convert their preferred shares into common shares, which could affect their payout in the event of a liquidation.
4. Protection provisions: Shareholders may also want certain protection provisions in place to ensure they receive a fair payout in the event of a liquidation. These could include anti-dilution provisions, which protect the value of their shares in the event of a new financing round.
Overall, a liquidation preference shareholder agreement is an important document for both shareholders and the company. By outlining the order of payouts in the event of a liquidation, it can help prevent disputes and ensure a fair distribution of funds. If you are an investor considering investing in a company, it is important to review the company`s shareholder agreements to determine your payout preferences and ensure you are protected in the event of a liquidation.