Module 3 · Chapter 9

Preference Shares and the Stack

Preference shares are paid before the other shares when a company is sold. This chapter shows where that right must be written, what it is worth, and the price at which it is worth nothing.

≈ 14 min read 8-question test

In this chapter

  • Why a share right works only if the constitution contains it
  • How a one times non-participating preference pays out, and in what order
  • What the Solaris stack paid at three different sale prices

9.1The liquidation preference in one paragraph

The Series A left Solaris with two classes of preference shares: the Seed Preference Shares, from the angels' money, and the Series A Preference Shares. They sit on the same register as the founders' shares, but on a sale they are paid first. That right is the liquidation preference.

The investors take back the money they put in before the ordinary shares receive anything. If the price is high, they can give up that right and share the price like everyone else.

Key point

A liquidation preference is a floor, not a share of the upside. It decides everything at a low price and nothing at a high one. So the figure to watch is the size of the stack, and every round makes it bigger.

Also in this chapter

  1. Why share rights must be written in the constitution
  2. What “one times non-participating” means
  3. The Preference Amount is the money actually paid
  4. How the classes rank, and the consents that allowed it
  5. How a preference reaches a sale
  6. The waterfall at three prices
  7. Participating preferences
  8. A preference ranks only among shareholders
  9. Your job

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