Liquidation preference is one of the most consequential lines in any term sheet, because it decides who gets paid first — and how much — when a startup is sold, acquired, or wound down. It’s usually written as a multiple of the original investment: a “1x liquidation preference” means an investor gets their money back in full before common shareholders (founders and employees) see a single peso, before anyone splits what’s left based on ownership percentage.

Most deals use a standard, non-participating 1x preference, which investors consider fair since it just protects their downside. A “participating” preference is more aggressive: the investor gets their money back first AND still shares in whatever’s left over with everyone else, effectively double-dipping. Higher multiples (2x, 3x) show up mostly in distressed or late-stage down-round deals, where an investor is taking on real risk and prices that risk into the terms.

Why founders should care: liquidation preference only really bites in a mediocre exit. If a startup sells for a huge multiple of what was raised, everyone does fine regardless of the preference stack. But in a modest exit — the company sells for just slightly more than total capital raised — a stack of preferences can mean investors walk away with everything and founders and employees get little or nothing, even though the company “succeeded” by being acquired.

🇵🇭 Philippine Example

Philippine startups raising institutional capital — whether from local funds such as Kickstart Ventures and Foxmont Capital or from regional and global investors — typically use liquidation preference clauses modeled on standard international VC term sheet templates, since most institutional term sheets used in the region follow broadly similar structures regardless of where the startup is incorporated.

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