
We are pleased to share with you a collaborative series between Fox Williams and Republic Europe designed to help investors and entrepreneurs gain a clearer understanding of the investment terms outlined in a company’s legal documents.
Fox Williams is a full-service leading law firm that regularly advises investors investing in start-ups and scale-up companies, as well as entrepreneurs and early-stage companies seeking equity investment from angel investors and venture capital funds.
In this article—the first within the series—we will guide you through liquidation preferences, what they mean in practice, current market trends, and how Republic Nominee handles them.
What are liquidation preferences?
Investors in early-stage companies have certain rights to protect their investments. These rights are based on the law and the company’s constitutional documents, which include:
- The Articles of Association: A document that sets out the company’s purpose and the way it is managed and administered.
- The Shareholders Agreement: A contract between the company and its main shareholders that governs their relationship with one another.
The key investor rights stem from the class of shares they invest in. Each class of shares comes with its own set of rights, which can vary based on the company’s constitutional documents.
As companies grow and become more sophisticated, they often introduce multiple classes of shares, such as preference shares. The variations amongst share classes usually focus on control (voting, consent rights, etc.) and economic aspects (capital returns on investment). Preference shares, for example, typically offer economic advantages over ordinary shares, including priority to receive proceeds on a liquidation or an exit. Ordinary shares are a basic share class that entitles the holder to vote and participate in proceeds on a capital return event, all on a pro-rata basis.
At Republic Europe, one of the standout features is our nominee structure. This means we hold and manage shares in companies on behalf of our investors once an investment is made via our platform. Acting as a nominee, we are generally authorised to make decisions on behalf of all our investors, including reviewing liquidation preferences during new financing rounds for our portfolio companies.
Purpose of a liquidation preference
A liquidation preference gives certain shareholders the right to receive a payout first during an exit or liquidation event, ahead of other shareholders. While the goal for most companies is to achieve a successful exit that delivers strong returns to their investors, not every company makes it to that stage.
Liquidation preferences are in place to help protect preferred investors by ensuring they receive a return, usually limited to their initial investment, before other shareholders see any returns, therefore protecting them from a loss on their investment.
Preferred shareholders typically invest in companies at later stages, thereby investing at a higher company valuation, resulting in a smaller ownership percentage. As a result, to protect their investment, they often require a liquidation preference compared to earlier-round investors, who generally may hold ordinary shares only. Sometimes, there may already be a liquidation preference in the company, and these later-stage investors may ask for a more senior liquidation preference to enable them to participate in proceeds ahead of the other preference shareholders.
Features of a liquidation preference
A liquidation preference is a combination of a few key features:
- Preference amount and multiple (1x, 2x, etc.)
- Non-participating vs. participating
- Seniority
Preference Amount and Multiple: This refers to the price that investors will receive for each preferred share that they hold. The amount they will receive is usually described as a multiple to their initial investment. For example, a preference amount with a 1x multiple ensures preferred shareholders get their investment back first, while a higher multiple (such as 2x or 3x) means they receive two or three times their original investment before the rest of the funds are distributed to other shareholders. Higher multiples reduce the share of remaining proceeds available for others.
Preferred shareholders should also have the option of converting their preferred shares into ordinary shares if it benefits them – typically when the total proceeds exceed the preference amount. In such cases, the preference(s) no longer apply, and all shareholders receive distributions on a pro-rata basis as ordinary shareholders.
Non-participating vs. participating: this determines whether preferred shareholders can receive additional proceeds beyond their initial preference amount.
- Participating preference: Preferred investors first get their preference amount and then share in any remaining proceeds on a pro-rata basis, essentially allowing them to “double-dip”. They not only benefit from their preference but also share proceeds alongside the ordinary shareholders.
- Non-participating preference: Preferred investors receive their preference amount first but do not share in the remaining proceeds. However, they can still choose to convert their preferred shares into ordinary shares if doing so would yield higher returns.
Seniority: When a company issues preferred shares across different funding rounds, the proceeds from an exit or liquidation are distributed based on a priority order – called the “distribution waterfall.” Typically, newer investors (the most recent funding round) are paid first, and then proceeds flow down to earlier rounds, following a “last in, first out” structure.
Calculating a liquidation preference
In the event of an exit, the distribution of proceeds among the different share classes will depend on two key factors: i. the specific preference terms attached to the preferred shares and ii. the exit price achieved by Company A.
In both examples below, Company A raised £1,000,000 from new investors at a pre-money valuation of £10,000,000, they were issued 100,000 preferred shares at a share price of £10. These preferred shares carry a 1x non-participating or participating preference (depending on the example), meaning a preference amount of £10 per share. The company already had ordinary shares in issue.
The table below shows how proceeds available on an exit or liquidation event would be distributed to the different share classes.
Example A

Figure 1: Example A Distribution Chart
A 1x non-participating preference becomes relevant for preferred shareholders if Company A is sold at a price lower than what was paid for their preferred shares, thereby protecting their investment. However, if the company exits at a price higher than what they invested at, it would be advantageous for preferred shareholders to convert their shares to ordinary shares. This allows them to receive additional proceeds by participating on a pro-rata basis alongside the ordinary shareholders.
Example B

Figure 2: Example B Distribution Chart
In this scenario, preferred shareholders have the right to participate on a pro-rata basis in the remaining proceeds after securing their preference right, i.e., their initial investment amount through the proceeds distribution. This allows them to benefit from both their preferred payout and any additional share of the remaining proceeds, maximising their return but at the expense of ordinary shareholders.
Market trends
In a recent report published by HSBC Innovation Banking (formerly Silicon Valley Bank UK), the data shows that in Seed rounds (companies raising under £2m), only 65% of those deals included a liquidation preference of any kind. However, by the time Series A and Series B rounds are closed, the vast majority (87% and 97% respectively), include some form of liquidation preference for investors.
In deals where a liquidation preference has been agreed, more than 85% of those are non-participating liquidation preferences (and typically with a 1x multiple). This is in contrast to only 2 or 3 years ago where many more deals included a participating liquidation preference. Accordingly, despite capital raising becoming more difficult since the highs of 2022 where you would expect terms to be more investor-friendly, in relation to liquidation preferences the opposite is true, where investors seeking participating preference rights (“the double dip”) are now largely off-market and will be seen by companies as an aggressive offer.
Liquidation preference & EIS
Preferred shares are often sought by institutional investors and can invalidate an investor’s SEIS/EIS tax benefit, depending on how the preference is structured in the company’s legal documents.
Fox Williams is experienced in dealing with scenarios whereby SEIS/EIS investors are able to maintain their SEIS/EIS status and yet still include a liquidation preference. The key in doing so is to ensure that upon a liquidation event (including an exit), funds are distributed at the same time thereby no shareholder receives funds in preference to others. Whilst funds may be distributed at the same time, the different classes of shares receive a disproportionate allocation of those funds. For instance, if there is a £1mil liquidation preference, companies are permitted to structure the distribution to its shareholders as follows:
- 99.99999% of the £1mil is allocated to the preferred shareholders; and
- 0.000001% of the £1mil is allocated to the ordinary shareholders.
The Republic Europe nominee’s position on liquidation preferences
When making decisions on behalf of underlying investors, Republic Europe, as a nominee, always acts with the intention of (a) maximising potential returns and (b) ensuring fair treatment for all investors.
It is important for investors to understand that during future funding rounds, incoming investors may exert significant negotiating pressure on companies. Often, companies must choose between agreeing to these new terms or risking the loss of much-needed funding. In some cases, as a minority shareholder, the Republic Europe nominee’s consent may not be required for a company to move forward with new funding.
If these new investment terms involve ‘non-standard’ liquidation preferences, such as participating preferences or high multiples, the Republic Europe nominee will first assess the company’s financial situation. If pushing back on such terms could threaten the company’s survival, the Republic Europe nominee may agree to them, only if our consent is needed. If we consider a pre-emption round is in the best interests of investors, we will aim to secure a pre-emption round, allowing our investors to invest under the same terms. The Republic Europe nominee will carefully consider which share class to offer, factoring in the share class(es) previously held by investors and any tax relief offered in past rounds.
In some instances, however, the investment terms may not require the consent of Republic Europe. The company may require existing shareholders to waive their pre-emption rights, which could affect our ability to offer this pre-emption opportunity to our investors.
The data shows that liquidation preference terms are market standard for companies raising seed investment. The preference is there to mitigate investment risk, particularly where large sums are being invested at higher valuations. We appreciate that investors may consider liquidation preferences a bitter pill to swallow, considering they favour later-stage investors compared to not only the early investors who supported the company earlier on but also the founders of the company.