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Liquidation Preference

A special right of an investor who owns preferred stock (often in a privately held company); it confers privileges not available to holders of common stock. For example, a liquidation preference gives special rights in a company liquidation, which is how proceeds from an acquisition would be distributed to shareholders. Employees in a private company should understand whether its outside investors (e.g. a venture capital firm) have liquidation preferences, which affect the value of employee stock options and private company common stock in an acquisition.

For more on stock and stock valuation in privately held companies, see the section Pre-IPO elsewhere on this website.

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