Dividend Preference vs Liquidation Preference: The Two Term Sheet Clauses Founders Confuse

Dividend preference differs from liquidation preference at exit.

Introduction: two term sheet clauses, one word that confuses them

A founder receiving a first term sheet often reads two neighbouring expressions without grasping their real scope: "dividend preference" and "liquidation preference". Both contain the word "preference", both protect the investor, and both appear almost systematically in the preferred shares issued in a funding round. Yet they do not play on the same field: one concerns a periodic distribution of earnings, rarely paid in cash before an exit, the other concerns how the proceeds of a sale or a liquidation of the company are split. A preferred share is a capital security carrying special rights that depart from the common regime of ordinary shares, and the term sheet is the document that summarises those rights before the final shareholders' agreement is drafted.

"When a company is formed or during its existence, preferred shares may be created, with or without voting rights, carrying special rights of any kind, on a temporary or permanent basis.", article L. 228-11 of the French Commercial Code (author's rendering of the official French text).

The confusion stems from three factors that compound each other in 2026:

the Anglo-Saxon vocabulary of term sheets (dividend preference, liquidation preference, participating preferred) does not always translate cleanly into other languages, and even within English the two terms sit close enough together to blur for a first-time founder;
the dividend preference is almost always theoretical in a young company that distributes nothing, which leads founders to neglect it, even though it can resurface at exit as a cumulated amount;
the participating and non-participating variants of the liquidation preference change the final calculation radically, and few founders model that calculation before signing.

This article details the definition, origin, mechanics and mistakes to avoid for each of the two clauses, illustrates their interaction with two verified worked cases, one in France, one in Switzerland, and provides a comparison table to quickly settle between the two notions.

Secure the negotiation of your next term sheet

Before negotiating a preference clause, it helps to understand its quantified impact on your own capitalisation table. Book a 30-minute call with Hectelion to have your term sheet reviewed and model exit scenarios before signing, whether you are a founder raising funds or an investor looking to calibrate a reasonable offer against the French-Swiss market.

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Definition: what is a preferred share in a term sheet?

A preferred share is a capital security that departs from the common regime of ordinary shares to grant its holder, most often a venture capital fund or a business angel, additional economic, political or financial rights. In a funding round, these rights are negotiated in the term sheet, a document that is not binding on substance and summarises the economic and legal terms of the investment before the final shareholders' agreement and articles of association are drafted. Two protective clauses appear in almost every such set of special rights: the dividend preference and the liquidation preference.

The dividend preference is a right to receive a priority dividend, cumulative or not depending on the articles of association, before any distribution to ordinary shareholders. The liquidation preference is a right to be reimbursed first, up to a multiple of the amount invested, most often 1x, before any sharing of the proceeds of a sale or a liquidation among the other shareholders. Under Swiss law, article 656 of the Code of Obligations frames these same advantages under the heading of preferred shares, specifying that they may relate in particular to the dividend and to the liquidation share. Both clauses are negotiated on the basis of the valuation retained in the term sheet, whether that is the pre-money or post-money valuation of the company.

Origin: why preference clauses appeared in venture capital

Preference clauses were not born in technology startups. The principle of a share carrying a priority dividend has existed in French and Swiss law since the nineteenth century, to fund capital issues without immediately diluting the control of existing shareholders. The right to a priority liquidation, in turn, comes directly from American venture capital practice of the 1980s, when funds sought a mechanism to limit their risk against technology companies whose probability of failure far exceeded that of a typical SME.

The clauses became widespread in France and Switzerland in the 2010s, as American venture capital funds and local venture capital structures imported Silicon Valley term sheet standards, documented in particular by the model templates published by private equity professional associations. Today, the combination of a dividend preference and a liquidation preference appears in almost every round financed through preferred shares, whether a seed round or a Series C, with variations in multiple and rate depending on the balance of power between founders and investors at the time of negotiation. These clauses do not, however, appear in the earliest-stage financing instruments, as shown by the comparison between the SAFE and the BSA-AIR used in seed rounds, which defer negotiating these special rights to the following financing round.

The dividend preference: a priority right rarely paid in cash

The dividend preference, sometimes loosely called a "dividend bonus" in founders' everyday language, grants the investor a right to receive a set dividend, generally expressed as a percentage of the issue price or the par value of the shares, before any distribution to ordinary shareholders. Under French law, this priority dividend is charged by preference against the distributable profit of each financial year, under article L. 228-11 of the Commercial Code, which lays down the principle of statutory freedom to define the special rights attached to preferred shares. Under Swiss law, article 656 of the Code of Obligations provides for the same logic for preferred shares.

In startup practice, this right usually remains theoretical before an exit. A young company in growth phase reinvests its earnings, when it generates any, and almost never pays a cash dividend to its shareholders, ordinary or preferred alike. The dividend preference is therefore not, in practice, a regular income for the investor. Its real value shows up at exit, when the articles of association provide for a cumulative feature: the amount not paid each year then adds up over subsequent financial years and swells the investor's claim at the time of a sale or liquidation, turning a right that stayed virtual for years into a significant amount to be deducted from the sale proceeds before any sharing.

The rate set in the articles of association varies with negotiations and market conditions. Practitioners most often observe rates in the order of 6% to 8% per year where the clause exists, with no statute or uniform market practice fixing that level: it is negotiated case by case between the founder and the investor, in the same way as the liquidation preference multiple.

The liquidation preference: the clause that reshuffles exit proceeds

The liquidation preference is the most decisive protective mechanism for the economic outcome of a funding round. It guarantees the investor priority reimbursement from the proceeds of a sale, a merger or a liquidation of the company, up to an agreed multiple of the amount invested, before founders and other ordinary shareholders receive anything. Unlike the dividend preference, it never concerns a periodic earnings distribution: it is only triggered on a liquidity event, defined broadly by the articles of association to include a change of control and not merely the formal dissolution of the company.

The most common multiple is 1x the amount invested: the investor recovers their stake before any sharing, nothing more. According to Osler's annual report on venture capital financings, 94.6% of the deals observed in 2025 provided for precisely this 1x multiple, which remains the market standard for a seed or Series A round under normal conditions. Higher multiples (1.5x, 2x, sometimes more) exist, but they generally signal difficult market conditions or an entry valuation the investor judges risky, and remain the exception rather than the rule in French and Swiss financing rounds.

Participating vs non-participating: the variant that changes everything

Beyond the multiple, the most decisive variable of the liquidation preference is whether it is participating or non-participating. The non-participating liquidation preference gives the investor a binary choice at exit: recover the preferred amount, or opt for voluntary conversion to ordinary shares to share in the exit proceeds pro rata to their stake. The investor always picks the more favourable option, but never stacks the two. This is the structure most favourable to founders, and, according to market data compiled by Corporate Finance Institute, also the most common structure in today's funding rounds.

The participating liquidation preference works differently: the investor first receives the preferred amount, then also shares in the remaining balance with ordinary shareholders, pro rata to their equity stake. This mechanism, sometimes called "double dip" in English-language practice, lets the investor collect twice on the same pool of value: once as a priority creditor, once as a shareholder. A capped variant, known as capped participating, limits this additional participation to a maximum multiple of the amount invested, generally between 2x and 3x, to bound the double-dip effect in very high-valuation exit scenarios.

The cumulative mechanism: when dividend and liquidation preference add up

The point most often underestimated by founders is the interaction between the two clauses when both are cumulative and participating. In that configuration, the preferred dividend not paid each year adds up, year after year, to the base amount of the liquidation preference. At exit, the investor then recovers not just the initial 1x, but that 1x increased by several years of cumulated dividend, and, if the clause is participating, then shares the remaining balance with the founders pro rata to their stake.

This combination has a mechanical effect on founders' real economic dilution at exit, distinct from the classic capitalisation-based dilution measured as a percentage of capital held on a fully diluted basis. The more years that have elapsed since the investment, the larger the cumulated dividend grows the investor's priority claim, and the smaller the share of exit proceeds available to founders, even though their percentage ownership of the capital has not changed. The two worked cases presented further on in this article illustrate exactly this mechanic, with and without a participating clause, on a French exit and a Swiss exit.

How a preference clause is negotiated in a term sheet

Negotiating a preference clause is built in several successive steps:

the founder must precisely identify what the term sheet proposes: the liquidation preference multiple, whether it is participating or not, whether a preferred dividend exists and at what rate, and whether that dividend is cumulative or not;
several exit scenarios should be modelled, at low, mid and high valuations, to measure the real impact of each clause on the amount founders ultimately receive, rather than reasoning only in terms of percentage of capital held;
the founder negotiates the most sensitive levers: the liquidation preference multiple, aiming for 1x rather than a higher multiple, non-participating rather than participating, and no cumulative feature for the preferred dividend, or failing that a capped rate and cumulation period;
these negotiations fit into the overall balance of the term sheet, alongside valuation, the anti-dilution mechanism and governance rights, since an investor may agree to give ground on a preference clause in exchange for a concession elsewhere;
the final drafting of the articles of association and the shareholders' agreement must faithfully reflect what was negotiated in the term sheet, a gap between the two documents being a frequent source of dispute at exit.

When these clauses come into play in a startup's life

Preference clauses are activated at precise moments in a company's life cycle. They are negotiated at every financing round through the issuance of preferred shares, from seed to Series C and beyond, whether for a new investor or an existing investor making a follow-on investment, and can differ from one round to the next: a founder can end up with several layers of preferred shares stacked on top of each other, each carrying its own liquidation preference and a repayment rank that can be pari passu or subordinated from one layer to the next, which considerably complicates the payment waterfall calculation at exit.

They are concretely triggered by a liquidity event, defined broadly by the articles of association to cover not only judicial or voluntary liquidation of the company, but also a change of control, a merger, or sometimes an initial public offering depending on the negotiated terms. It is at that precise moment, and only then, that the payment waterfall applies: first the company's creditors, then the preferred shareholders according to their rank and multiple, and finally the ordinary shareholders, founders included, who share what remains.

Who to turn to for negotiating these clauses

Three profiles typically take part in negotiating and modelling a term sheet that includes preference clauses. The corporate lawyer drafts and legally secures the articles of association and the shareholders' agreement, faithfully translating the negotiated terms. The fundraising adviser or financial structuring adviser models exit scenarios and quantifies the economic impact of each clause on the final split of exit proceeds, beyond the simple percentage of capital held. The statutory auditor or accountant, finally, handles the accounting treatment of preferred shares and, where relevant, their valuation for purchase price allocation purposes.

Hectelion works on this second strand, alongside founders and investors, to model the full set of exit scenarios of a funding round, measure the quantified impact of dividend preference and liquidation preference clauses, and value the preferred shares themselves when such a valuation is required, as part of its fund raising advisory and business valuation engagements in France and Switzerland. To place this modelling work in the overall budget of a transaction, see also how much a funding round costs.

Comparison table: dividend preference and liquidation preference

The table below summarises the functional differences between the two clauses, for a quick read before negotiation.

Criterion	Dividend preference	Liquidation preference
Nature of the right	Priority dividend on distributable profit	Priority reimbursement from exit or liquidation proceeds
Trigger	Decision to distribute earnings (general meeting)	Liquidity event: sale, merger, liquidation
Calculation basis	Rate applied to the issue price or par value	Multiple applied to the amount invested (most often 1x)
Frequency of actual payment in a startup	Very rare before an exit (for lack of distributions)	Systematic on a liquidity event
Possible cumulative feature	Yes, the most common in practice: the unpaid amount adds up	Not applicable: the multiple is fixed, set once and for all
Main variants	Cumulative or non-cumulative	Participating or non-participating, capped or not
Impact at exit	Increases the investor's priority claim if cumulative	Directly determines the split of proceeds between investor and founders

Hectelion table, 2026. The rates and multiples cited are market orders of magnitude, to be negotiated case by case in each term sheet.

Advantages: protection, alignment and attractiveness for investors

Dividend preference and liquidation preference clauses offer real advantages, provided one does not focus solely on the founders' position. They first offer protection for the capital invested, which reassures the investor against the high risk of total loss inherent to startups, and so facilitates the investment decision at stages when the company has no solid financial track record yet to justify its valuation. They then help align the interests of founders and investors on the exit horizon, since the payment waterfall structure encourages both sides to pursue an exit valuation high enough for everyone to benefit, rather than a hasty exit at a low value. Finally, having these standardised clauses speeds up the negotiation of a funding round, since they rest on vocabulary and structures known to all venture capital participants, which reduces the time spent on legal documentation compared with an entirely bespoke negotiation.

Limits: dilution, complexity and rigidity on exit

These same clauses carry significant limits for founders. The first is the real economic dilution at exit, described above, which can meaningfully reduce the share of exit proceeds received by founders even when their percentage ownership of the capital stays stable, particularly when several financing rounds stack successive liquidation preferences. The second is the complexity of negotiating and tracking them: a founder who has raised several rounds must simultaneously track several multiples, several participating or non-participating features and several cumulative dividend rates, which makes calculating their own exit share difficult without dedicated financial modelling. The third is the rigidity it introduces into the exit negotiation itself: a high or participating liquidation preference can discourage a potential acquirer if it leaves too small a share for the target's operating managers, which sometimes complicates the very closing of the transaction the clause was meant to protect.

The 5 mistakes to avoid

Mistake 1: Confusing dividend preference and liquidation preference

The most frequent confusion is believing these are one and the same clause under two different names. A founder who neglects the dividend preference because it will "never be paid in cash" forgets that, if cumulative, it will swell the investor's claim at precisely the moment it matters most: the exit. Reading each clause separately, with its own definition and its own trigger, is the first reflex to adopt before any negotiation.

Mistake 2: Ignoring whether the dividend preference is cumulative

A non-cumulative dividend preference that is never paid simply disappears each year. A cumulative dividend preference, on the other hand, adds up year after year and can represent, after five or six years, an amount equivalent to several tens of percentage points of the capital originally invested. Checking that single word, "cumulative", in the articles of association radically changes the scale of the risk for founders.

Mistake 3: Overlooking the impact of a participating clause at exit

Accepting a participating liquidation preference without measuring its effect amounts to accepting that the investor collects twice on the same pool of value. The gap between a participating and a non-participating structure can represent several million euros or Swiss francs of difference for founders on the same exit, as shown by the two worked cases presented further on in this article.

Mistake 4: Accepting a liquidation preference multiple above 1x without a trade-off

The market standard documented by annual reports from funds and specialised firms remains, very largely, a 1x multiple. Accepting 1.5x or 2x without negotiating a clear trade-off, whether a more favourable valuation, lighter governance or the absence of a participating feature, amounts to giving up a significant advantage for no identifiable reason.

Mistake 5: Not modelling several exit scenarios before signing

The only reliable way to understand the real impact of a term sheet is to calculate, for several possible exit valuations (low, mid, high), what the investor and the founders would actually receive under each clause assumption. Signing a term sheet on the sole basis of the percentage of capital given up, without this modelling, is the costliest and most frequent mistake among first-time founders.

Case 1: sale of a French medtech for €10 million

A French medtech raises €3.0 million in a Series A from a venture capital fund, at a pre-money valuation of €9.0 million, that is a post-money valuation of €12.0 million and a 25% stake for the investor. The term sheet provides for a 1x liquidation preference and an 8% cumulative preferred dividend per year, not paid in cash. Three years later, the company is sold for €10.0 million.

Dividend cumulated over three years: €3.0 million × 8% × 3 years = €0.7 million (rounded to one decimal)
Investor's total preferred claim: 3.0 + 0.7 = €3.7 million

Non-participating scenario:

Conversion value to ordinary shares: 25% × 10.0 = €2.5 million
Since €3.7 million is higher than €2.5 million, the investor keeps the preference and receives €3.7 million
Founders and other ordinary shareholders share the balance: 10.0 − 3.7 = €6.3 million

Participating scenario:

The investor first receives the preferred claim of €3.7 million
They then participate, pro rata to their 25%, in the remaining balance of 10.0 − 3.7 = €6.3 million, that is 25% × 6.3 = €1.6 million (rounded)
They therefore receive a total of 3.7 + 1.6 = €5.3 million
Founders now receive only 6.3 − 1.6 = €4.7 million, instead of €6.3 million in the non-participating scenario, that is €1.6 million less for the sole consequence of the clause's participating feature, on an exit nonetheless below the initial post-money valuation

Case 2: sale of a Swiss scale-up for CHF 42 million

A Swiss SaaS scale-up raises CHF 6.0 million in a Series B, at a pre-money valuation of CHF 24.0 million, that is a post-money valuation of CHF 30.0 million and a 20% stake for the investor. The term sheet provides for a 1x liquidation preference and a 6% cumulative preferred dividend per year, not paid in cash. Four years later, the company is sold for CHF 42.0 million.

Dividend cumulated over four years: CHF 6.0 million × 6% × 4 years = CHF 1.4 million (rounded to one decimal)
Investor's total preferred claim: 6.0 + 1.4 = CHF 7.4 million

Non-participating scenario:

Conversion value to ordinary shares: 20% × 42.0 = CHF 8.4 million
Since CHF 8.4 million is higher than CHF 7.4 million, the investor converts their shares and receives CHF 8.4 million
Founders and other ordinary shareholders share the balance: 42.0 − 8.4 = CHF 33.6 million

Participating scenario:

The investor first receives the preferred claim of CHF 7.4 million
They then participate, pro rata to their 20%, in the remaining balance of 42.0 − 7.4 = CHF 34.6 million, that is 20% × 34.6 = CHF 6.9 million (rounded)
They therefore receive a total of 7.4 + 6.9 = CHF 14.3 million
Founders now receive only 34.6 − 6.9 = CHF 27.7 million, instead of CHF 33.6 million in the non-participating scenario, that is almost CHF 5.9 million less

This second case shows that the participating clause penalises founders even on an exit far above the initial post-money valuation, precisely because the double-dip mechanism applies regardless of how successful the exit is.

Mini-calculator: the same round, three exit scenarios

Let us take the Case 2 figures and vary only the exit valuation, to isolate the effect of the one parameter that actually matters at the time of selling: how much the company is worth. The Swiss scale-up raised CHF 6.0 million in a Series B, with a 20% stake for the investor, a 1x liquidation preference and a 6% cumulative preferred dividend per year. After four years, the cumulated dividend reaches CHF 1.4 million and the total preferred claim reaches CHF 7.4 million. That claim is fixed: only the exit valuation changes between the three scenarios below.

The table below repeats the mid scenario already calculated above (CHF 42.0 million) and adds two bounds: a low exit at CHF 15.0 million, close to the threshold where the preferred claim still exceeds the conversion value into ordinary shares, and a high exit at CHF 90.0 million, well above the initial post-money valuation of CHF 30.0 million.

Chart: exit proceeds split by exit scenario

The chart below revisits the same three exit scenarios to show at a glance how exit proceeds are split between the investor's preferred claim, cumulative dividend included, and the share that goes to the founders. The amounts shown correspond exactly to the "non-participating" row of the detailed table below.

Split of exit proceeds between preferred investors and founders across three exit scenarios

Split of exit proceeds	Low exit: CHF 15.0 million	Mid exit: CHF 42.0 million	High exit: CHF 90.0 million
Conversion value to ordinary shares (20%)	CHF 3.0 million	CHF 8.4 million	CHF 18.0 million
Non-participating — investor	CHF 7.4 million (claim retained)	CHF 8.4 million (conversion)	CHF 18.0 million (conversion)
Non-participating — founders	CHF 7.6 million	CHF 33.6 million	CHF 72.0 million
Participating — investor	CHF 8.9 million	CHF 14.3 million	CHF 23.9 million
Participating — founders	CHF 6.1 million	CHF 27.7 million	CHF 66.1 million
Gap for founders (participating vs non-participating)	− CHF 1.5 million	− CHF 5.9 million	− CHF 5.9 million

Hectelion table, 2026. Calculated from the Case 2 figures (CHF 6.0 million raised, 20% stake, 1x liquidation preference, 6% cumulative dividend over four years, CHF 7.4 million preferred claim). Figures rounded to one decimal.

Three lessons emerge from this mini-calculator:

At the low exit, the CHF 7.4 million preferred claim still exceeds the CHF 3.0 million conversion value: the non-participating investor therefore keeps the preference rather than converting, and the gap between the two structures stays contained at CHF 1.5 million, because the base on which the extra participation is calculated is itself reduced.
At the mid and high exits, the conversion value exceeds the preferred claim: the non-participating investor systematically converts their shares, and the gap caused by the participating feature alone settles at CHF 5.9 million, whether the exit happens at CHF 42.0 million or at CHF 90.0 million.
This CHF 5.9 million floor is no coincidence: once the conversion threshold is crossed, the gap between a participating and a non-participating structure equals exactly the preferred claim multiplied by the share held by founders and other ordinary shareholders, that is CHF 7.4 million × 80% in this deal. The double dip of a participating clause therefore does not fade with the success of the deal: it takes a constant amount in absolute value, regardless of how large the exit is, even though its relative weight shrinks as a percentage of total proceeds.

Word from the CEO

"I too often see founders sign a term sheet reading only the valuation line, without opening the page on preference clauses which, in practice, will weigh far more heavily on what they actually receive on exit day.", Aristide Ruot.

"In my fundraising advisory engagements, I systematically take the time to model two or three exit scenarios with the founder, at different valuations, so they understand the concrete effect of a 1.5x multiple or a participating clause, rather than explaining the theory in the abstract.", Aristide Ruot.

"I advise French and Swiss founders to negotiate the cumulative feature of the preferred dividend with the same energy as the liquidation preference multiple: it is the most underestimated clause in the term sheet, and it is often the one that changes the final outcome.", Aristide Ruot.

FAQ: the 10 essential questions on dividend preference and liquidation preference

Introduction: what to know before the questions

The ten questions below cover the most frequent sticking points Hectelion observes in its French-Swiss fundraising advisory engagements, from the basic definitions to the finer points of negotiation.

Q1: What is a dividend preference in a term sheet?

It is a right to receive a priority dividend, before any distribution to ordinary shareholders, generally expressed as a percentage of the preferred shares' issue price. It can be cumulative or non-cumulative depending on the articles of association.

Q2: What is a liquidation preference?

It is a right to be reimbursed first, up to a multiple of the amount invested, before any sharing of the proceeds of a sale or a liquidation among the other shareholders. The most common multiple is 1x.

Q3: What is the difference between a dividend preference and a liquidation preference?

The dividend preference concerns a periodic earnings distribution, decided at a general meeting and almost never paid in cash before an exit in a startup. The liquidation preference concerns the split of the proceeds of a liquidity event, sale or liquidation of the company, and is systematically triggered at that moment.

Q4: Is the preferred dividend really paid in cash in a startup?

Very rarely before an exit, since a young growth company generally distributes no earnings. When cumulative, however, the unpaid amount adds up each year and is added to the investor's claim at the time of exit.

Q5: What is a participating clause (participating preferred)?

It is a variant of the liquidation preference in which the investor first receives their preferred amount, then also shares in the remaining balance with ordinary shareholders, pro rata to their equity stake, which doubles their advantage compared with a non-participating clause.

Q6: Why does a cumulative dividend worsen founders' dilution?

Because it increases, year after year, the amount of the investor's preferred claim, which mechanically reduces, at exit, the share of exit proceeds available to founders, even if their percentage ownership of the capital has not changed.

Q7: What liquidation preference multiple is considered normal in 2026?

The 1x multiple remains, by a wide margin, the market standard for seed and Series A rounds under normal conditions. Higher multiples exist but generally signal tight market conditions or a negotiation unfavourable to founders.

Q8: Can an investor stack a preferred dividend AND a participating clause?

Yes, and it is precisely this combination that produces the most unfavourable effect for founders: the cumulated dividend swells the base preferred claim, and the participating clause then also lets the investor share in the remaining balance with ordinary shareholders.

Q9: How can a founder negotiate these clauses in a term sheet?

By modelling several exit scenarios at different valuations before signing, and by prioritising the negotiation of a 1x multiple, the absence of a participating feature, and the absence of a cumulative feature for the preferred dividend, or failing that a capped rate and cumulation period.

Q10: What happens on a low-valuation exit?

This is precisely the scenario in which the liquidation preference protects the investor the most, and weighs most heavily on founders: if the exit proceeds are lower than or close to the amount invested plus the cumulated dividend, the investor recovers most or all of the proceeds, leaving a residual, sometimes nil, share for ordinary shareholders.

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Conclusion: read a term sheet clause by clause, never as a whole

The dividend preference and the liquidation preference both protect the investor, but they are triggered neither at the same moment, nor on the same basis, nor with the same consequences for founders. The first concerns an earnings distribution that remains in practice virtual until exit, except when cumulative. The second directly governs the split of exit proceeds, and its participating variant can cost founders several million euros or Swiss francs on the same deal, as the two worked cases in this article demonstrate.

A term sheet is never read valuation line by valuation line: it is read clause by clause, systematically modelling how they interact across several exit scenarios. It is this discipline, more than theoretical knowledge of the definitions, that genuinely protects founders when it matters.

Summary

The dividend preference is a right to a priority dividend, cumulative or not, which usually remains theoretical in practice before an exit, for lack of earnings distributions in a young company. The liquidation preference is a right to a priority reimbursement of exit or liquidation proceeds, up to a multiple of the amount invested, most often 1x according to 2025 market data, and comes in participating or non-participating versions.

When both clauses combine, a cumulative dividend and a participating liquidation preference, the effect on founders' real economic dilution at exit can be considerable, as illustrated by the two worked cases in this article, one on a French medtech sold for €10.0 million, the other on a Swiss scale-up sold for CHF 42.0 million. In both cases, the gap between a participating and a non-participating structure represents several percentage points of exit value, regardless of how successful the deal was.

Negotiating a term sheet therefore means understanding each clause separately, checking whether it is cumulative and participating, and modelling several exit scenarios before signing. This is the support Hectelion offers founders and investors in its fundraising advisory and business valuation engagements in France and Switzerland.