A liquidation preference is a right held by preferred (institutional) investors to be paid back first — often 1x their investment, sometimes more — from the proceeds if the company is sold or wound up, before ordinary equity holders receive anything. It is one of the most important terms in a venture financing.
Why it matters to you
This is a hidden risk for retail buyers of unlisted shares, who almost always hold ordinary equity. In a strong exit, everyone does well. But in a modest or distressed sale, preferred investors can take most or all of the proceeds via their liquidation preference, leaving ordinary holders with little or nothing — even though the company "sold".
Example: A startup sold for ₹200 crore, but ₹180 crore went to preferred investors under a stacked liquidation preference, leaving ordinary unlisted holders almost nothing. This often surfaces in a down round.