← All terms The liquidation preference defines what preferred shareholders receive, ahead
of common, when the company is sold, merged or wound up (a “liquidity event”,
not just an actual liquidation). The standard term is 1x non-participating:
the investor chooses the better of getting their money back or converting to
common and taking their percentage. The aggressive variants multiply: a 2x or
3x preference returns multiples of cost first; participating preferred takes
the preference and then shares in the remainder (“double dip”), sometimes
softened by a cap.
Stack order matters as much as size. Across several rounds, preferences are
either stacked, the latest money out first, or pari passu, all preferred
sharing proportionally. A deep, stacked, senior preference pile changes who
gets paid at every exit value below the stack’s total.
The discipline is to negotiate the term with the waterfall open, not in the
abstract: 1x non-participating, pari passu where it can be had, and a model
showing what common receives at a range of exit values. A flattering headline
valuation bought with a participating 2x preference is frequently worth less
to founders, at every realistic exit, than a lower valuation on clean terms.
In Canada
Canadian rounds are generally smaller in CAD terms, but many Canadian exits are modest too, so the preference stack can still swallow a realistic acquisition price; model the waterfall at low exit values before signing. The CVCA model documents used in most Canadian financings anchor on 1x non-participating, a useful reference when a term sheet drifts toward participating or multiple preferences. When a US fund leads in USD, the preference is denominated in USD while a Canadian acquirer may pay in CAD, so exchange-rate moves shift the waterfall between financing and exit. Founders and employee option holders sit at the bottom of the stack; run the model for them.
Run the numbers
An investor put CA$5,000,000 at 1x non-participating for 20% ownership. At a $20,000,000 exit they take the greater of their preference ($5,000,000) or their as-converted share (20% × 20,000,000 = $4,000,000): they take $5,000,000, and common splits the remaining $15,000,000. At a $50,000,000 exit they convert and take $10,000,000. The crossover where converting beats the preference sits at a $25,000,000 exit. The same stake switched to 1x participating takes, at the $50,000,000 exit, the $5,000,000 preference and then 20% of the remaining $45,000,000 ($9,000,000), for $14,000,000 against $10,000,000 as-converted: the extra $4,000,000 is the double dip, paid out of common.
Updated July 9, 2026. Open this term in the app →
