Liquidation Preferences Revisited
At foundation of a start-up company, rules how to distribute earnings at exit need to be defined. This is not a straight-forward task for two reasons: For one, contributions of involved parties are heterogeneous: a dedicated team, innovation and a plan on the side of the founders versus money at different stages by the investors. Second, distributions occur in a far future, and countless scenarios with chances, risks and imponderability determine the value for the parties at the exit point.
Next to valuation at the stage of investment, the definition of liquidation preferences is an important instrument to achieve a fair and balanced distribution at exit.
The talk will give insight into different forms of liquidation preference in a systematic and exemplary quantitative manner. The conclusion will be that there are some provisions that should be avoided, yet that there is no best standard.