Liquidity Event

finance a la shmoop. what is liquidity preference?

yeah well liquidity is a good thing you want it. being liquid means that you have

cash which gives you options to you know buy stuff. and yeah even the Amazon River [money leaves a wallet in the grocery store]

shops at Amazon. all right so if your flavor of

investment has a liquidity preference over someone else's then your investment

all else being equal is preferable. see the liquidity preference . specifically if

you have liquidity preference and usually this is found in the form of

early stage of venture capital investor term sheets for investing in companies

in the form of convertible preferred stock- like it converts into common at

the IPO or something like that- then you get paid before everyone else

gets paid -at least in this form of stock- if the company gets sold.

all right well technically that is, but the company is sold and your convertible

preferred hasn't converted into common shares yet this company didn't go public. [convertible stock made into common stock]

but so like let's think about the example where if the company raised

twelve million bucks in preferred stock, which all had a liquidity preference

over and above common ,and then the whole company was sold for just fifteen

million dollars. well then those with liquidity preference would get liquid

first .ie they get their twelve million bucks. then the remaining three million

would be sprinkled around everyone else who was do the dough. plus any dividends

or accrued assets that have come our way otherwise. and yes technically debt

holders get paid ahead of the various series preferred investors who then get [list of who gets paid first]

paid ahead of the common shareholder but that's a different video. all right so

when it comes down to it you want to have liquidity preference. clearly I

prefer to be liquid myself. [man floats in lake in an inner tube]