Pro rata liquidating distribution
Upon distribution of property in complete liquidation, the corporation is treated as if the distributed property is sold at FMV to the distributee (Sec. The distributee shareholder generally must recognize gain or loss equal to the difference between the FMV of the property received and his or her basis in the corporation's stock (Sec. Possibility of Gain or Loss Recognition Gain is recognized by a member in an LLC classified as a partnership on the receipt of a liquidating distribution to the extent money is distributed in excess of the distributee member's basis in his or her LLC interest (see Sec. 751 hot assets (unrealized receivables and substantially appreciated inventory) are not proportionate (see Sec.751(b)); (2) property that had an FMV different from basis on the date of contribution is distributed to a member other than the contributing member within seven years of contribution (see Sec.Typically, a liquidation preference is designed to protect an investor's monetary investment in a situation where, for whatever reason, the proceeds of a liquidation to be distributed to all investors are less than the amount of the investors' original investment.
The liquidation preference entitles holders of preferred stock to receive distributions of proceeds from an exit transaction before holders of common stock and other series of preferred stock with a lower preference priority and, in certain cases, entitles preferred stock to participate with holders of common stock after payment of the initial preference amount.
Is there anything else that you should think about before you pump your fist in triumph? There is another important thing: the liquidation preference.
Venture capital investors almost always insist on investing through a "preferred" equity instrument, typically referred to as preferred stock.
(Note, that it is mostly back to 1x today.) The next thing to consider is whether or not the investor shares are participating.
Again, note that many people consider the term “liquidation preference” to refer to both the preference and the participation, if any.