Liquidation Preference
Investor right to receive proceeds before equity holders on a liquidation event. Indian VC standard is 1x non-participating.
Liquidation preference is the right of preference shareholders (typically holders of CCPS) to receive a defined amount before equity shareholders on a 'Liquidation Event' — defined in the SHA to include winding-up, but also (and more importantly in practice) a deemed liquidation: any sale, merger, or change of control of the company.
Three structural variants:
- Non-participating (Indian market standard for early-stage VC) — preference shareholder takes the higher of: (a) their liquidation preference (typically 1x of invested amount), or (b) the proceeds they would receive as if converted to equity.
- Participating — preference shareholder takes their liquidation preference and then participates pro-rata as equity in the remaining proceeds. Double-dipping. Aggressive; rare in clean Indian Series A but seen in late-stage / distressed rounds.
- Capped participating — participating, but total return is capped at a multiple (e.g., 2x or 3x) of invested capital.
The multiple:
- 1x — Indian VC market default.
- 1.5x or 2x — appears in down rounds, distressed bridges, or where investors take on significant risk.
- >2x — flag this — it severely impairs founder economics in mid-range exits.
Worked example — investor put in ₹50 crore at ₹100 crore post-money (50% on CCPS), exit at ₹200 crore:
- 1x non-participating: investor takes max(₹50 crore, 50% × ₹200 crore) = ₹100 crore. Founders/equity get ₹100 crore.
- 1x participating: investor takes ₹50 crore + 50% × (₹200 - ₹50) = ₹50 + ₹75 = ₹125 crore. Founders/equity get ₹75 crore.
- 2x participating capped at 3x: investor takes ₹100 crore + 50% × (₹200 - ₹100) = ₹150 crore, capped at ₹150 crore (= 3x). Founders/equity get ₹50 crore.
Stacking (seniority):
- Pari-passu (Indian default) — all preference rounds rank equally; proceeds shared in proportion to their preferences.
- Senior — later rounds rank ahead of earlier rounds (US default in some structures). Forces earlier investors to either participate or be subordinated.
The Liquidation Event definition is everything — argue carefully whether IPO is excluded (typically yes), whether a primary-only secondary triggers it (typically no), and whether asset sales trigger it.
The dominant Indian VC instrument. Preference shares that must convert to equity by a fixed date — providing downside protection plus equity upside.
Investor right that adjusts conversion price when a company issues shares at a lower price in a later round. Indian VCs typically take broad-based weighted-average.
Order in which fund proceeds flow to LPs and GPs. Two main structures: European (fund-as-a-whole) and American (deal-by-deal). Indian AIFs lean European.
Investor right to force minority shareholders to join a sale on the same terms. Standard in Indian VC SHAs; usually triggered above a threshold consideration.