What is the priority of the liquidation preference when the Series B financing occurs?
June 20, 2007
In a Series A financing, the priority of the liquidation preference vis a vis other series of preferred is not relevant because there are no other series of preferred stock. However, in a Series B financing, the new investors may request that their liquidation preference be senior to the Series A. In other words, the Series B gets paid before the Series A. The Series A investors may argue that the priority of the Series B liquidation preference should be the same, or “pari passu,” with the Series A. Founders and companies should be very careful when negotiating liquidation preferences (and any term) at the Series A stage. When the Series B financing occurs, the Series B will demand at least the same level and priority of rights as the Series A. Although a 2x preference may not seem that onerous while raising $2 million of Series A, a 2x preference on $20 million will significantly affect the holders of common stock.