DigiU Preferred Shares: Liquidation Preference

We continue our series of posts about rights. As a reminder, the final list will be confirmed by 01.07.2025.

Liquidation preference is an investor's right to receive payout on a priority basis in the event of a company’s liquidation, sale, merger, or other major transformation involving asset distribution.

This mechanism protects investments, especially in high-risk or long-term scenarios.

Types of liquidation preferences:

Liquidation preference

Return of the initial investment before funds are distributed to common shareholders.

Multiplier (e.g., 1.5x or 2x)

The investor receives an increased amount, such as 1.5 or 2 times their investment. This approach is used in high-risk or long-term capital lockup scenarios.

Participating preference

After receiving a priority payout, the investor also participates in the distribution of remaining assets alongside common shareholders. This boosts overall returns but is applied selectively to maintain a balance of interests.

Non-participating preference

The investor receives either a fixed priority payout or participates in the general distribution, whichever is more beneficial. Often structured as «investor’s choice».

Seniority

If the company has multiple classes of preferred shares, liquidation preference may vary. For example, Series A may take precedence over Series B.

Example:

If a company has ~ $1M left after liquidation and an investor has a 1x priority on ~ $100,000, they receive that amount before the remaining ~ $900,000 is distributed among others.

These mechanisms are exclusive to preferred shareholders.

Liquidation preference is a capital protection tool. It ensures asset distribution in non-standard scenarios and reduces risks for investors in early-stage projects.

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