A liquidation preference is a contractual right granted to preferred shareholders (typically investors) ensuring they receive a specified amount — usually a multiple of their investment — before any distributions to ordinary shareholders in a liquidation, sale or liquidity event. It exists in participating and non-participating variants. Its level (1x, 1.5x, 2x invested capital) and nature directly condition the economic allocation between founders and investors at exit. In fundraising negotiations, the liquidation preference is one of the most economically significant terms alongside the pre-money valuation.

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Example: a fund invests CHF 5.0 million in Series A preferred shares with a 1x non-participating liquidation preference. In a sale at CHF 12.0 million (post-money valuation CHF 18.0 million), the fund receives CHF 5.0 million first, with founders sharing CHF 7.0 million — better for founders than if the fund had converted (28% × 12.0 = CHF 3.4 million only). At CHF 25.0 million, the fund converts (28% × 25.0 = CHF 7.0 million > CHF 5.0 million preference).

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Hectelion models liquidation preference waterfalls across all exit scenarios to optimise the economic allocation between founders and investors in fundraising negotiations.