Liquidation preferences for investors putting actual cash into a business exist for a reason. Suppose I have a company idea, maybe an early prototype and manage to raise $2MM at $10MM post-money valuation. The investors have a 20% stake for their investment.
If I decide the next day, “Nah, it’s not going to work; let’s close the company and distribute the assets to the shareholders,” it would be manifestly unfair for the 80% shareholders to take $1.6MM of the $2MM in the bank and give the VCs back the $400K that represents their 20% stake in the bank account.
Liquidation preferences ensure that the first $2MM that comes out goes to them.
If I decide the next day, “Nah, it’s not going to work; let’s close the company and distribute the assets to the shareholders,” it would be manifestly unfair for the 80% shareholders to take $1.6MM of the $2MM in the bank and give the VCs back the $400K that represents their 20% stake in the bank account.
Liquidation preferences ensure that the first $2MM that comes out goes to them.