Investor question 41 of 50 · Valuation, cap table & terms
“What liquidation preference are you offering?”
Short answer: the investor is really asking how are we protected in a downside? Answer in three steps: (1) standard: 1x non-participating, pari passu with other preferred; (2) show what it means in an exit table; (3) push back on participation or multiples above 1x.
What they're really asking
How are we protected in a downside? Investors rarely care about the question on its own. They're testing whether you know your numbers cold, whether your assumptions are honest, and whether you can explain them simply.
How to answer, step by step
- Standard: 1x non-participating, pari passu with other preferred.
- Show what it means in an exit table.
- Push back on participation or multiples above 1x.
An example answer
1x non-participating. At a $25M sale, preferences mean founders receive about 57% of proceeds.
Figures are from Loopdesk, the fictional SaaS company in our sample files. Swap in your own numbers and keep the structure.
The answer that loses trust
Avoid
Agreeing to participating preferred without modelling it.
Where the proof lives
Before the meeting, find the number behind your answer. In our workbooks it lives in: Exit Waterfall. If you can open that tab and point to it, the follow-up question is easy.