Glossary · Equity and dilution · Updated 28 August 2026
A liquidation preference sets the order and the amount each shareholder receives when the company is sold. A 1x non-participating preference guarantees the investor gets their money back before founders receive anything.
This is the clause that matters most in mid-range exit scenarios, and the one founders neglect most because they model the good case. On a very large exit the preference is irrelevant: everyone does better converting to ordinary shares. It is in between that it decides everything.
Two variants exist. Non-participating lets the investor choose between getting their money back or taking their percentage, but not both: this is the European standard and the more balanced one. Participating lets them take their money back and then share pro rata in what remains — sometimes called a double dip, and markedly worse for founders.
The multiple stacks on top. A 1x preference equals the amount invested; a 2x doubles the priority amount. Above 1x, the clause is considered aggressive on a European seed or Series A today, and usually signals a weak market or a fragile deal.
Example: an €8M exit under each preference type
An investor put in €3M for 30%. The company sells for €8M, below expectations.
| Investment | €3,000,000 for 30% |
|---|---|
| Sale price | €8,000,000 |
| 1x non-participating — investor | max(€3M; 30% × €8M = €2.4M) = €3,000,000 |
| 1x non-participating — founders | €5,000,000 |
| 1x participating — investor | €3M + 30% × €5M = €4,500,000 |
| 1x participating — founders | €3,500,000 |
| Difference for founders | €1,500,000 |
Same investment, same headline percentage, same sale price: the single differing line in the term sheet is worth €1.5M. On a €30M exit the gap would shrink sharply, because converting to ordinary shares becomes the better option.
The common mistake
Trading a participating preference for a higher valuation. It is a losing negotiation in every scenario but the best one: you pay in certain cash for a valuation that is only a headline until an exit actually happens.
Frequently asked questions
What is the difference between participating and non-participating?+
With non-participating, the investor picks either their money back or their percentage — whichever is higher. With participating, they take their money back and then also share pro rata in the remainder. The second is considerably more expensive for founders.
Is a 1x non-participating preference standard?+
Yes, it is the norm on European seed and Series A rounds. A multiple above 1x or a participating clause signal an unfavourable balance of power, and are worth challenging before being accepted in exchange for a flattering valuation.
Related terms
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