Senior Liquidation Preference
A particular class of shareholders is entitled to Senior Liquidation Preference, also known as Stacked Preference, which gives them a higher claim on liquidation proceeds than other shareholders.
What it Means:
In essence, Senior Liquidation Preference shields certain shareholders, often investors, by prioritizing their reimbursement during a company's liquidation event over other equity classes. This strategic advantage is designed to protect their initial investment.
How to Calculate:
The computation entails ascertaining the senior class of shareholders' preference for liquidation. For example, in the event of a liquidation, an investor holding shares in an Indian startup with a senior liquidation preference of INR 5 million will be entitled to receive this amount before other shareholders.
Why Measure:
For Indian founders, measuring senior liquidation preference is essential because it affects how proceeds are distributed after a company exit. It is a crucial indicator in financial planning since it impacts the desirability of investment deals and has the potential to influence later funding rounds.
Examples:
Imagine an angel investor owning senior preference shares in a tech startup in India. If an investor contributed INR 3 million to the company with a senior liquidation preference, they would be entitled to receive this sum ahead of other shareholders who would share in the remaining proceeds in the event of liquidation.
Understanding Senior Liquidation Preference empowers Indian founders to navigate funding negotiations, fostering a balanced financial ecosystem that safeguards investor interests while promoting sustainable startup growth.