Deal StructureValuation
Liquidation Preference
Also known as: Liq pref, preference stack, priority return, preferred return
The priority structure determining who gets paid first when a PE-owned company is sold again. The PE firm recovers their full investment plus a preferred return before the founder's rollover equity is worth anything.
WHY IT MATTERS
In a PE deal, the buyer's investment is structured as preferred equity that sits at the top of the payout waterfall. Before the founder sees a dollar on rollover equity, the PE firm recovers their full investment plus a preferred return — typically 8% to 10% compounding annually. On a 5-year hold, a $119M preference stack at 8% compounded grows to roughly $175M before anyone else gets paid. The liquidation preference determines the minimum exit value needed for the founder's equity to have any worth. Everything below the preference threshold goes entirely to the PE firm. Everything above it gets shared — and if the preference is participating, the PE firm shares in the upside too.