Liquidation Preference Series A Examples (Scenario Modeling)
last updated: Feb 10, 2026
Most founders pop champagne on the valuation but get killed on the terms. If you sign a term sheet without modeling the exit waterfall, you are handing investors a blank check for your own displacement. You don't need a finance degree to understand this, but you do need to know if you're getting screwed.
TL;DR
Liquidation preferences determine the payout order during an exit, specifically whether investors get their money back before or alongside common shareholders. In liquidation preference Series A examples, "Participating" preferences are the silent equity killer that can wipe out founder returns even in a successful exit.
The Cheat Code
How to read this: Use the scenario model below to audit your term sheet against standard market norms.
The Cheat Code
- Benchmark: Aim for 1x Non-Participating (Standard in 94–95% of healthy deals).
- Rule: Never accept >1x preference or "Participating" features without a massive valuation offset.
- Warning: A "2x Participating" clause can result in you getting $0 even on a $10M exit.
How to read this: Use the scenario model below to audit your term sheet against standard market norms.
Glossary
- Liquidation Preference: The multiplier of the original investment (e.g., 1x, 2x) that investors are guaranteed to recoup before common stock gets a cent. See more in our SaaS-specific examples.
- Non-Participating (Standard): The investor chooses either their guaranteed preference amount or their share of the proceeds as if they converted to common stock (whichever is higher). They do not get both.
- Participating (Predatory): The investor gets their guaranteed preference amount plus their pro-rata share of the remaining proceeds. This is "double dipping." See Investopedia's definition for a deep dive.
- The Waterfall: The hierarchy of payouts. Debt holders drink first, then preferred equity (VCs), then common equity (Founders/Employees).
How to model liquidation preferences
Below is a scenario model comparing a "Clean" Series A term sheet against a "Dirty" term sheet. Use this to audit your offers or plug these numbers into your Cap Table Template.
Assumptions for the Math
Liquidation Waterfall Table
Assumptions for the Math
- Series A Investment: $5,000,000.
- Post-Money Valuation: $25,000,000 (VC owns 20%).
- Founder Ownership: 40% (Fully Diluted).
- Other Common (Seed/Pool): 40%.
Liquidation Waterfall Table
Sample math (The Fire Sale @ $10M)
1x Non-Participating: The VC has a choice.
Sample math (The Base Case @ $30M)
1x Non-Participating:
1x Non-Participating: The VC has a choice.
- Option A (Preference): Take 1x Investment ($5M).
- Option B (Convert): Take 20% of $10M ($2M).
- Result: VC takes Option A ($5M).
- Remaining Pool: $5M.
- Founder Share: Founder owns 50% of the Common pool (40% Founder / 80% Total Common). Founder gets $2.5M.
- Remaining Pool: $0.
- Founder Share: $0. The founder works for free.
Sample math (The Base Case @ $30M)
1x Non-Participating:
- Option A (Preference): $5M.
- Option B (Convert): 20% of $30M = $6M.
- Result: VC converts. Everyone gets paid pro-rata. Founder gets 40% of $30M = $12M.
- Step 1 (Preference): VC takes 2x Investment ($10M).
- Step 2 (Participation): Remaining pool is $20M. VC takes their 20% share of this pool ($4M).
- Total VC Payout: $14M.
- Founder Share: Founder gets 40% of the remaining $20M pool = $8M.
Benchmarks
Before you negotiate, you need to know what is normal. According to Cooley's Q1 2025 Venture Financing Report, the market has spoken clearly:
The Takeaway: If a VC asks for "Participating Preferred" or a "2x multiple," they are asking for terms that appear in less than 5% of deals. This is a red flag unless your company is in severe distress.
- 94% of deals include a 1x Liquidation Preference.
- 95% of deals use Non-Participating Preferred stock.
The Takeaway: If a VC asks for "Participating Preferred" or a "2x multiple," they are asking for terms that appear in less than 5% of deals. This is a red flag unless your company is in severe distress.
Risks
Beyond the immediate math, agreeing to bad terms creates structural risks that can kill your company later.
The Preference Stack
Series A terms often set the precedent for Series B and C. If you give Series A investors "Participating Preferred," Series B investors will demand the same. This creates a "preference stack" where multiple layers of investors take their cut before you see a dime. In a $50M exit, you could own 30% of the company on paper but receive $0 in cash.
The Double Dip
"Participating Preferred" is often called "double dipping" because investors get their money back and keep their ownership percentage. This effectively lowers the valuation you thought you raised at. If you raised at a $25M post-money valuation with participating preferred, your effective valuation in an exit is significantly lower because that equity doesn't behave like true common stock.
The Preference Stack
Series A terms often set the precedent for Series B and C. If you give Series A investors "Participating Preferred," Series B investors will demand the same. This creates a "preference stack" where multiple layers of investors take their cut before you see a dime. In a $50M exit, you could own 30% of the company on paper but receive $0 in cash.
The Double Dip
"Participating Preferred" is often called "double dipping" because investors get their money back and keep their ownership percentage. This effectively lowers the valuation you thought you raised at. If you raised at a $25M post-money valuation with participating preferred, your effective valuation in an exit is significantly lower because that equity doesn't behave like true common stock.
Conclusion
Mastering liquidation preference Series A examples is a necessary defensive step, but it is not the whole picture. You can have the cleanest cap table in the world, but if your other variables (Offer Strength, Market Timing, Distribution) are weak, your probability of hitting $10k MRR remains near 0%.
Investors only care about these terms when there is something valuable to liquidate. If you haven't validated your offer or secured paying customers, arguing over "Participating vs Non-Participating" is essentially rearranging deck chairs on a ship that hasn't even left the harbor. Focus on revenue first; the leverage to negotiate these terms comes from your MRR, not your Excel skills.
Investors only care about these terms when there is something valuable to liquidate. If you haven't validated your offer or secured paying customers, arguing over "Participating vs Non-Participating" is essentially rearranging deck chairs on a ship that hasn't even left the harbor. Focus on revenue first; the leverage to negotiate these terms comes from your MRR, not your Excel skills.
FAQ
- You:Why would any founder agree to 2x Participating preferences?Guide:Desperation or ignorance. Usually, this happens in "down rounds" where the company is running out of cash and has no other options. VCs demand structured terms to protect their downside risk in exchange for bailing out the company. Recent data from Carta's Q1 2025 report shows that while down rounds are stabilizing, they remain a key driver for aggressive terms.
- You:Does the 'Option Pool' affect these calculations?Guide:Yes. The option pool dilutes the Common shareholders (Founders). In the examples above, if the option pool was larger, the Founder's 40% stake would be smaller, reducing the payout further. Compare this with a standard Seed Term Sheet Template to see how dilution evolves.
- You:Can I renegotiate these terms later?Guide:Rarely. Series A terms often set the precedent for Series B and C. If you give Series A investors "Participating Preferred," Series B investors will demand the same. This creates a "preference stack" that buries the founder at the bottom.
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