Liquidation Preference: Why Ownership and Proceeds Can Diverge in an Exit

When a startup is sold, its shareholders do not necessarily split the proceeds according to their stakes. Who gets paid first, and how much, is governed by the liquidation preference. In a masterclass in October 2025, Daniel La Marca, Team Lead Legal at Companisto, explained the common variants. Using a worked example, he showed how sharply they can shift the distribution, including at the expense of early investors.

A buyer pays €60 million for a startup that has gone through four funding rounds. The founders still own just under 23 percent of the company. If the proceeds were split by ownership, they would be entitled to about €13.8 million; in fact, they receive €8.4 million. The seed investors, who were the first to come in, also get less than their stake would suggest: €2.8 million instead of €4.6 million. By contrast, the Series C investors, who came in last, receive 40 percent of the proceeds for a quarter of the shares.

The example comes from the masterclass “Liquidationspräferenzen verstehen” (“Understanding Liquidation Preferences”), in which Daniel La Marca showed how much money can hinge on a few lines in a contract. Liquidation preferences set the order in which investors are paid out of exit proceeds, and how much they get, before the rest is divided according to ownership. According to market statistics La Marca cited, about 95 percent of all investment agreements in venture capital financings provide for such a preference in favor of the investors. That is in line with his own experience in several hundred transactions, he said.

What a liquidation preference governs

La Marca has seen firsthand how misleading the name can be. In one funding round, he said, a lawyer on the other side split hairs, arguing that because the term sheet said just “liquidation preference,” it applied only if the company was liquidated. In fact, preferences apply mainly to the proceeds of an exit, usually a sale of the company; liquidation is the exception. That is why La Marca referred to them as exit proceeds preferences and liquidation preferences.

A preference has little to do with insolvency. Once insolvency proceedings are opened against a startup, its creditors are paid first out of the remaining assets. The shareholders are entitled only to any surplus; as a rule, they come away empty-handed, whatever preference they agreed on.

In La Marca’s experience, the preference is almost always set out only in the shareholders’ agreement. Unlike the articles of association, this contract among the shareholders is not filed with the commercial register and therefore is not open to public inspection. In a stock corporation (AG), the equivalent document is called an Aktionärsvereinbarung in German. What the investors agree on there is their private business, La Marca said. Some model contracts, however, put the preference in the articles of association; as far as he knew, these include the documentation of the German Standards Setting Institute (GESSI). He cautioned, though, that he had not looked at that template in some time. When reviewing an investment, investors should therefore read the articles of association as well as the shareholders’ agreement.

Types of liquidation preference

In his presentation, La Marca illustrated the variants with three images: a “safety net,” a “double safety net,” and a “booster.” The images describe how preferences work when proceeds are distributed; none of them offers a guarantee on the capital invested.

The non-participating liquidation preference

The “safety net” stands for the simple non-participating liquidation preference. “Simple” means equal to the amount invested, not a multiple of it. If the exit proceeds are not enough to pay everyone, the investors are meant to at least get their money back at their tier in the ranking, as far as the money will stretch. In the final pro rata distribution, however, that amount counts against their share: the other shareholders are paid first, until they have caught up with the investors on a per-share basis. The upshot is that an investor receives either the preference or a pro rata share of the proceeds still left after the senior tiers, whichever is greater. The preference therefore matters only at low sale prices, and even then only as far as the proceeds available at its tier allow.

The participating liquidation preference

The “double safety net” is the participating liquidation preference, the counterpart to the non-participating one. Investors first receive an amount equal to their investment, to the extent the proceeds cover it, and then also share in the remaining proceeds with their full pro rata stake. In other words, they dip into the pot twice; practitioners call this double dipping. For the founders, that makes a significant difference, because they get only their pro rata share of whatever is left after all the preferential claims. Even at high proceeds, the other shareholders would never be put on a fully equal footing, according to La Marca’s presentation.

Multiples and interest

A multiple or interest turns a preference into a “booster.” Either can be combined with the non-participating or the participating variant. The preference amount is then a multiple of the investment, such as 1.2x, 1.5x, or 2x, or the investment plus notional interest, for example 6 percent a year; sometimes the two are combined. This amount, too, is paid only to the extent the proceeds cover it. In an illustrative overview, La Marca rated combinations of multiples and interest: he described the simple preference without interest as the standard, and twice the investment plus 8 percent interest a year as “unfair to founders.” A 3x multiple occurs only very rarely, he said.

Companisto does not ask for twice the investment plus interest in its own negotiations, La Marca made clear; if the investors in every round got that, only an exceptionally large exit would leave anything for the founders. If a startup’s existing shareholders have already agreed to such terms, however, Companisto has no choice but to negotiate the same for Companisto investors, he said.

Who gets what out of €60 million

You have to run the numbers on liquidation preferences at least once to see what each party actually ends up with, La Marca said.

Who gets paid first

With each funding round, the valuation, and with it the share price, typically changes; ideally, it goes up. That is why each round usually gets its own share class, and therefore its own tier in the ranking, with later rounds ahead of earlier ones. It makes no sense for someone who paid a very low price in the first round to get a more senior class than someone who paid more later, La Marca argued. At the very bottom are the founders, whose shares carry no preference. When two rounds are close together in time and the prices barely differ, they are sometimes combined into a single class; according to La Marca, investors tend not to like that.

If the proceeds are not enough to pay all the investors in a tier in full, they split the available amount pro rata, which according to La Marca means in proportion to their stakes in the share capital. The junior tiers then get nothing.

The calculation, step by step

La Marca showed how the tiers interlock, using the example of a startup that had been through four funding rounds. The founders had put in €25,000 in share capital and the investors a combined €41 million, most recently €20 million in the Series C at a pre-money valuation of €60 million. The seed and Series A investors have a simple, or 1x, preference; the Series B can claim 1.4 times its investment up front, and the Series C 1.2 times. All the preferences are non-participating.

Share classes and preferences after the Series C (in order of seniority; percentages rounded)

The buyer pays €60 million, a quarter less than the €80 million at which the startup was valued after the Series C (a €60 million pre-money valuation plus €20 million in fresh capital). In the example, all the shareholders sell, and costs and other deductions are left out; the full €60 million is distributed.

The calculation follows two rules. First, payouts are made tier by tier, starting with the most recent round. Second, for each share class, the question is whether its investors would do better by giving up the preference and splitting whatever is still left at that point with all the junior shareholders pro rata. Whichever result is better applies; La Marca spoke of an “overlaying” preference (überlagernde Präferenz).

• Series C: Its preference amount is €24 million. On a pro rata basis, it would be entitled to a quarter of the €60 million, or just €15 million. It keeps the preference. That leaves €36 million.
• Series B: Its preference amount is €16.8 million. Of the 81,778 shares held by the Series B, the Series A, the seed investors, and the founders, it holds 30,667, or 37.5 percent. Pro rata, it would therefore receive €13.5 million of the remaining €36 million. It keeps the preference. That leaves €19.2 million.
• Series A: Its preference amount is €8 million. Pro rata, it would get just under 35 percent of the €19.2 million (17,778 of 51,111 shares), or about €6.7 million. It keeps the preference. That leaves €11.2 million.
• Seed: Its preference amount is €1 million. The remaining €11.2 million is now shared only by the seed investors and the founders, because the three later rounds have already been paid. Of their combined 33,333 shares, the seed investors hold 8,333, or a quarter. Pro rata, they therefore receive €2.8 million, almost three times their preference. So they give up the preference and are treated like the founders.
• Founders: They are left with €11.2 million minus €2.8 million, or €8.4 million.

For the Series C, giving up the preference pays off only once a quarter of the purchase price exceeds its €24 million, that is, at a purchase price of about €96 million or more. At that point, all classes are paid pro rata.

Three distributions compared

How the €60 million is distributed (in € million, rounded)

* Editorial calculation based on the share counts in the presentation; “participating” assumes the same preference amounts as in the example (€49.8 million in total). Figures may not add up exactly due to rounding.

Of the three distributions, the middle one is La Marca’s example; the other two were calculated by the editors. If all the preferences are participating, the investors in every share class first receive their preference amounts, totaling €49.8 million. The remaining €10.2 million is then divided among all the shareholders pro rata, including the investors who have already been paid. That leaves the founders with only about €2.3 million; La Marca put the figure at “a little over 2 million.”

Compared with a split by ownership, the only winner in the example is the Series C, which came in last and at the highest price. Despite its 1.4x multiple, the Series B ends up almost exactly where it would be without preferences, and the Series A, at €8 million, just gets its investment back. The seed investors receive €2.8 million instead of €4.6 million, and with participating preferences only €1.8 million, because the later rounds would then dip in a second time. So stronger preferences by no means benefit every investor.

At a purchase price of €48.8 million or less, the seed investors would get nothing at all, because the preference amounts of the three later rounds alone would use up the entire proceeds (editorial calculation).

Is investing early still worth it?

During the Q&A, one participant asked why the Series C in the example got a multiple, when it was the seed investors who had borne the greater risk. That varies from case to case, La Marca replied. A €60 million exit could indicate that the company’s prospects were no longer all that bright, he said; the investors who came in last might then have negotiated an extra advantage over the other shareholders.

A question from the chat raised a similar point: Is investing at the seed stage less worthwhile than investing in later rounds because of preferences? Not necessarily, La Marca said. The terms are a matter of negotiation and depend on the company’s financial situation. If a startup is growing steadily, he said, no founding team will agree to worse terms. In response to a follow-up from another participant, he acknowledged that a startup’s success is hard to predict. But when growth is steep, nobody can push through a multiple, he said; you only see that with risky investments that don’t return much. Negotiating a 3x multiple as an investor is something he considers “a bit dishonest, really.”

Measured against what they put in, the seed investors do the best of all the investors in the worked example (which assumes a €60 million sale), despite their low ranking. They came in at €120 per share, the Series C at about €734. The seed investors turn €1 million into €2.8 million; the Series C ends up with 1.2 times its investment. This leaves aside how long the money is tied up in each case (editorial calculation).

Investing directly or through an SPV

Investors who take part in a closed angel round on Companisto become shareholders of the startup directly, whether it is a GmbH or an AG. They are covered by the preference agreed for their round’s share class. In the second funding phase for private investors, who can participate with as little as €250, it is not possible to become a shareholder of a GmbH directly. Investors then acquire profit participation certificates issued by a special purpose vehicle (SPV), which in turn takes up shares in the startup. The certificates give their holders claims against the SPV, above all to a share in its profits, but no shareholder rights in the startup. A liquidation preference therefore benefits certificate holders only indirectly, if at all, to the extent that a preference has been agreed for the SPV’s shares and the terms of the certificates pass the proceeds on to investors. With startups organized as stock corporations, investors can also become shareholders directly in the second funding phase for private investors. The rights that apply in each case are set out in the documents for the funding round in question.

A preference offers no capital guarantee. It governs only how the proceeds of an exit are distributed, and it does not help if no buyer can be found or the startup becomes insolvent. Investing in startups means providing venture capital: a total loss is possible, an exit is often many years away, and until then stakes are difficult to sell. Investors should therefore commit only money they can do without for the long term and spread it across several investments.

Other exit-related clauses

What counts as an exit

The starting point is the definition of an exit, because it determines when the preferences apply. The definition typically covers a sale of shares (share deal), a sale of the business or its key assets (asset deal), an IPO, and a liquidation, which is very rare in practice. According to La Marca, a sale of shares usually counts as an exit if more than half of the shares are sold. In a share deal, the buyer pays the purchase price to the selling shareholders. In an asset deal, it goes to the company, which must first settle its liabilities and taxes before it can distribute the rest to the shareholders. For an IPO, the contracts set out separately what happens to the preferences.

What actually gets distributed

Contracts generally distinguish between gross and net exit proceeds. Transaction costs, such as fees for advisers and the notary, are deducted from the gross proceeds. Depending on the contract, other deductions may apply as well; according to La Marca, these sometimes include the company’s liabilities and claims that must be paid ahead of the shareholders, for example from a silent partnership (stille Beteiligung). In rare cases, contracts also provide for a carve-out for the founders (Catch-up-Regelung): they receive part of the gross proceeds, say €500,000, up front, bypassing the preferences. According to La Marca, investors agree to this to keep founders motivated if they would otherwise be left with hardly anything once all the preferences are paid. Only what remains after that, the net proceeds, is distributed through the tiers.

If an investor sells only part of their shares in an exit, their preference is almost always reduced proportionally as well; that is “absolutely standard,” La Marca stressed. He explained the opposite model with an example: an investor has put in €1 million and received 1,000 shares for it. Even if the investor sells just a single share in the exit, they still get the full million. An outcome like that is absurd, he said, but it does occasionally turn up in contracts. Companisto doesn’t build anything like that in, he said, “because it’s simply unfair.”

Can a preference be changed later?

Asked what investors can do if they don’t like an existing preference, La Marca pointed to negotiations. But what investors have negotiated for their share class generally stays in place, he said. Tampering with it in later funding rounds at the expense of existing investors is very difficult. Exceptions are rare, for example when a company is about to go under and a rescuer will step in only on certain conditions.

Shareholders’ agreements can provide that a supermajority is enough for amendments; La Marca mentioned 90 or 95 percent. In that case, though, it is standard to add the condition that no existing shareholder may be made worse off as a result, especially when it comes to preferences, he said. This reflects a principle established by the courts: as a rule, a majority may not interfere with the financial rights of individual shareholders, such as their share of the proceeds, without their consent. At Companisto, the business angels’ votes are bundled through a pooling agreement; that agreement determines what the majority in the pool can decide and what still requires the consent of each individual angel. Holders of profit participation certificates have no voting rights of their own in the startup; the shareholder is the SPV.

The usual case, in which new investors in a later round receive a senior share class, is a different matter. That is agreed with the existing shareholders as part of the funding round; earlier investors move down the ranking as a result.

How the INVEST grant limits preferences

Anyone who invests directly in an eligible startup, meaning they acquire newly issued GmbH shares or common shares worth at least €10,000 and do not already hold shares in the startup, can apply to the Federal Office for Economic Affairs and Export Control (BAFA) for the INVEST grant. It amounts to 15 percent of the issue price of the shares, up to €50,000 per investment. Eligible applicants are individuals of legal age whose primary residence is in the European Economic Area, as well as certain business angel companies. The application must be submitted before the investment agreements are signed, and the shares must be held for at least three years. There is no legal entitlement to the grant, and it is not available for profit participation certificates.

The program sets limits on preferences. Under BAFA’s rules, a preference equal to the amount invested is considered customary in the market. It may be combined with interest of no more than 10 percent a year or with a multiple of no more than 2, and all investors in a funding round must be treated equally. The reason is that, under the funding guidelines, INVEST supports only shares that fully bear the entrepreneurial risk. These rules have applied since May 1, 2025. Before that, the cap on the multiple was 1.5; that older figure is the one La Marca cited in the masterclass. With eligible startups, Companisto makes sure that the preferences stay within the permitted limits, he said.

Under the current funding guidelines, the complete applications from the startup and the investor must reach BAFA by December 31, 2026, and the startup must submit its application before the investor does. Whether the program will continue after that had not been decided at the time of writing.

Conclusion

At a high sale price, non-participating liquidation preferences hardly matter. They become important when a sale brings in less than hoped. Then, as the example from the masterclass shows, they shift millions: from the founders to the investors, and from the early backers to the later ones. But the distribution must not become too lopsided, because founders who end up with nothing lose the drive to make the company a success. With every offering, it pays to check the documents: how the round’s share class ranks, what the senior rounds’ preference amounts add up to, whether the preferences are non-participating, and whether a multiple or interest has been agreed. Anyone acquiring profit participation certificates should also check how the certificate terms pass on the SPV’s proceeds.

According to Companisto’s lawyers, when they draft a funding round’s shareholders’ agreement themselves, whether for a GmbH or an AG, a liquidation preference in favor of the investors is standard; holders of profit participation certificates benefit from it only indirectly, if at all, through the SPV. What the preference is worth in an exit, however, depends on the purchase price and on its rank relative to later rounds. It does not rule out losses.

Note: This article is based on the Companisto masterclass of October 29, 2025; some of the information on Companisto’s investment structure and contract practice comes from another masterclass, held on February 3, 2026. Assessments of market practice and contract practice reflect the situation at the time of each masterclass; the information on the INVEST grant is as of October 2026. The editors’ comparative calculations are simplified. This article is for general information only and does not constitute legal, tax, or investment advice. Investing in startups involves considerable risks and can result in the total loss of the capital invested.