Seniority in Liquidation Preference
Seniority determines the order in which investors are paid during a liquidation event. It is essential in cases where multiple rounds of funding have occurred, each potentially with different liquidation preferences.
1. Senior Liquidation Preference:
- Definition: Senior investors are paid before junior investors and common shareholders.
- Mechanism:
- Investors from the latest funding round typically have senior liquidation preference.
- In the event of liquidation, senior investors receive their full liquidation preference before any junior investors receive anything.
- Example: If a company has Series A and Series B investors, Series B investors might have senior liquidation preference over Series A. Thus, Series B investors would be paid first.
2. Pari Passu Liquidation Preference:
- Definition: Investors with pari passu liquidation preference are paid simultaneously, on an equal footing.
- Mechanism:
- Proceeds are distributed proportionally among investors with the same seniority level.
- Example: If Series A and Series B investors have pari passu liquidation preference, they share the proceeds proportionally based on their investments.
3. Junior Liquidation Preference:
- Definition: Junior investors are paid after senior investors have received their liquidation preference.
- Mechanism:
- Junior investors and common shareholders only receive proceeds once all senior liquidation preferences are fulfilled.
- Example: Series A investors might be junior to Series B investors, meaning they only receive proceeds after Series B investors have been paid in full.
How to Add Liquidation Preference Seniority on Capboard
Managing liquidation preference seniority on Capboard is straightforward. Follow these steps to correctly set up Senior, Pari Passu, and Junior liquidation preferences for your investors:
1. Senior Liquidation Preference:
- Step-by-Step Instructions:
- Navigate to the Share Class section in Capboard.
- Click Edit on the relevant share class.
- Select Liquidation Preference.
- For the most senior investors, enter 1 in the seniority field.
- For the second most senior investors, enter 2 in the seniority field.
- Continue this pattern, assigning a higher number for each subsequent level of seniority (e.g., 3, 4, etc.).
- Example:
- Series B investors (most senior): Seniority 1
- Series A investors (next senior): Seniority 2
- Seed investors (third senior): Seniority 3
2. Pari Passu Liquidation Preference:
- Step-by-Step Instructions:
- Navigate to the Share Class section in Capboard.
- Click Edit on the relevant share class.
- Select Liquidation Preference.
- In the seniority field, enter 1 for all investors who should share proceeds equally.
- Example:
- Series A investors: Seniority 1
- Series B investors: Seniority 1
3. Junior Liquidation Preference:
- Step-by-Step Instructions:
- Navigate to the Share Class section in Capboard.
- Click Edit on the relevant share class.
- Select Liquidation Preference.
- For the most junior investors, enter 1 in the seniority field.
- For the second most junior investors, enter 2 in the seniority field.
- Continue this pattern, assigning a higher number for each subsequent level of juniority.
- Example:
- Seed investors (most junior): Seniority 1
- Series A investors (next junior): Seniority 2
- Series B investors (third junior): Seniority 3
By following these steps, you can accurately manage and reflect the liquidation preference seniority for your investors on Capboard, ensuring clarity and proper order of payment during a liquidation.
By Alex Bisbe
Capboard, CEO