Question 1

What is a liquidation preference?

Accepted Answer

The right of certain shareholders — almost always investors — to be **paid first** when a company is sold or wound up, before ordinary shareholders receive anything. It is frequently the single most consequential term in an investment.

**Why it exists.** An investor putting in £2m for 20% would, without protection, receive 20% of a £3m sale — £600,000, a substantial loss — while founders who invested little cash walk away with £2.4m. A preference ensures the investor's money comes back before value is distributed.

**The forms:**

**1x non-participating.** The investor receives **either** their money back **or** their percentage as an ordinary shareholder — whichever is greater, not both. This is the market standard and is genuinely reasonable.

**Participating ("double dip").** The investor takes their money back **and then** shares in what remains according to their percentage. This materially reduces founder and employee proceeds, and does so most at **modest** exit values — which is where most exits actually happen.

**Multiples** — 2x or 3x preferences, meaning several times the investment comes out first. Rare in good market conditions, more common in difficult ones.

**A worked illustration.** £5m invested for 25%, company sells for £20m:

**1x non-participating:** the investor takes the better of £5m or 25% of £20m (£5m) — so £5m, and £15m goes to everyone else.

**1x participating:** £5m first, then 25% of the remaining £15m (£3.75m) — **£8.75m**, leaving £11.25m. Nearly £4m less for everyone else, from one word in the term sheet.

**The stack matters.** Multiple rounds create multiple preferences. They are frequently **senior** — later investors paid before earlier ones — so a company that raised a great deal can be sold for a substantial sum with **nothing reaching ordinary shareholders**. This is why employees with options sometimes receive nothing from a headline-positive exit, and it is a genuine and under-communicated feature of venture-backed companies.

**Check the total preference stack** against plausible exit values before raising, and again before accepting a job with equity.

General information, not legal or financial advice.

Question 2

What actually matters in a term sheet?

Accepted Answer

Far less than the valuation, and far more than founders expect. A term sheet is mostly non-binding, but it sets the terms everything else follows from, and the economic and control clauses matter

Question 3

What is equity dilution?

Accepted Answer

Your percentage of a company falling because new shares were issued — not because anyone took shares from you. Understanding that distinction is the whole subject. How it happens. A company issues

Question 4

What are the realistic exit options for a business?

Accepted Answer

Fewer and less glamorous than the coverage suggests. The overwhelming majority of successful exits are trade sales, and several perfectly good outcomes are not exits at all. Trade sale (acquisition).

Question 5

What is a cap table?

Accepted Answer

A capitalisation table records who owns what proportion of a company — every shareholder, every class of share, every option and everything that could become a share. What it contains: Every

Question 6

How do you close a business properly?

Accepted Answer

Through a formal process appropriate to the structure and to whether the business is solvent — and the distinction between solvent and insolvent closure determines everything, including whether

Question 7

What is vesting, and what is a cliff?

Accepted Answer

Vesting means equity is earned over time rather than owned outright from day one. A cliff is an initial period during which nothing vests at all. The standard arrangement. Four-year vesting with a

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