How to use the liquidation preference calculator
- Enter the proceeds to shareholders, which is the money left for owners after debts and costs of the sale, and the number of common shares.
- Add each preferred series: the amount invested, the preference multiple, the shares it converts into, and whether it is participating. For a participating series you can also set an optional cap on its total payout.
- Choose the payout order: the first row paid first, or all preferences paid equally when proceeds fall short.
- Read who is paid what, whether each series takes its preference or converts to common, and the return on each investment.
Formula
Preference = amount invested x preference multiple
Non-participating: the holder takes the greater of the preference and its as-converted share
Participating: the preference first, then a share of the rest with common stock, per share
Capped participating: total payout (preference + share) stops at the cap x amount invested
Remaining per share = what is left after preferences / shares sharing it
Which series convert depends on what the others choose, so the tool repeats the choice until no holder would be better off switching.
Two non-participating series
Series A invested $5,000,000 for 2,000,000 shares and Series B invested $12,000,000 for 3,000,000 shares, both with a 1x preference. Common stock has 7,000,000 shares. At $30,000,000 of proceeds, nobody gains by converting. If A converted, it would receive 2/9 of the $18,000,000 left after B's preference, which is $4,000,000 and less than its $5,000,000 preference. If B converted, it would receive 3/10 of the $25,000,000 left after A's preference, which is $7,500,000 and less than $12,000,000. So B takes $12,000,000, A takes $5,000,000, and common stock receives the remaining $13,000,000.
At $60,000,000 both series convert because the as-converted shares are worth more than the preferences: A receives $10,000,000, B $15,000,000 and common stock $35,000,000. At $12,000,000 the money does not cover both preferences. With Series A first in the order, A takes its $5,000,000, B receives the remaining $7,000,000 and common stock receives nothing.
Preference, participation and conversion
A liquidation preference is a right of preferred investors to be paid before common holders in a sale. A 1x preference returns their money first. A non-participating holder then chooses between that preference and converting into common stock to share in the upside, and takes whichever pays more. A participating holder collects the preference and also shares in what is left, sometimes up to a cap.
The order of payment matters only when there is not enough money to cover every preference. If the first row is paid first, later rows can get nothing. If all preferences share equally, each gets the same fraction of what it is owed. Compare with Equity Dilution to see how ownership changes in a round, and with the Founder Equity Split Calculator for the early days.
What is not modeled
Real financing documents add many terms: accrued dividends, anti-dilution, option pools, management carve-outs, escrows, debt and transaction costs. They can move the numbers a lot. Enter the net proceeds that really reach shareholders and treat the result as a way to understand the structure, not a statement of what any person will receive.
For a simple two-party split of cash with a preferred return, use the Distribution Waterfall Calculator. For notes that convert into equity, use the Convertible Note Conversion Calculator. Always have your own documents reviewed by a lawyer.
Assumptions and limits
- Each series has one conversion ratio, entered as the number of common shares it becomes, and all shares of a series act together.
- Preferences are paid out of proceeds before any sharing, in the order you choose.
- The cap on a participating series is a multiple of its amount invested and includes the preference.
- The tool shows arithmetic for a sale. It is not legal, tax or investment advice.
Frequently asked questions
What is a 1x non-participating preference?
The investor gets the greater of their money back, or their share of the proceeds if they convert to common stock. They never get both. It is the most common form and is the baseline for comparing other terms.
What does participating mean?
A participating investor gets the preference first and then also shares in the remaining proceeds as if they had converted. A cap limits the total, after which the holder may prefer to convert instead.
Why does the order of series matter?
It only matters when proceeds are too small to pay every preference. Then the senior row is paid in full first, and junior rows share what is left. With enough proceeds the order has no effect.
How does the tool decide who converts?
It starts with no one converting and checks, from the lowest preference per share upward, whether a holder would receive more by converting given the others' choices. It repeats until the choices stop changing.