Legal Definitions - liquidation preference

Definition:Liquidation preference is a preferred shareholder's right to receive a specified distribution before common shareholders receive anything, once the corporation is liquidated.

Example: If a company goes bankrupt and is liquidated, preferred shareholders will receive their share of the assets before common shareholders receive anything. For example, if a company has $10 million in assets and preferred shareholders are entitled to a liquidation preference of $2 million, they will receive $2 million before any of the remaining $8 million is distributed to common shareholders.

This example illustrates how liquidation preference works in practice. Preferred shareholders have a higher priority in receiving their share of the assets compared to common shareholders.