Exiting your startup? Liquidation Preference will determine how much money you get

Simply put, it is the preference towards exit pickings for each class of shareholders in a company in the event of a strategic exit or sale for the shareholders. The Liquidation Preference clause and the waterfall it ensconces is a watershed provision in all term sheets and investment documents that usually decides who walks away grinning to the bank or otherwise.

Since a company chiefly bears exit returns to its shareholders and investors either through an IPO (which is when all private contractual agreements governing classes of securities fall away) or pre IPO sale of business, it is imperative for an investor to pre determine what component or percentage of the sale proceeds it will be entitled to when the cash is counted.

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Does your startup need a lawyer?

In one word? Yes

Having seen a few ventures ground upwards, I can vouch for statutory compliances and requirements not featuring into the top five agendas of startup managements. Typically, Indian startups somehow have a tendency to push anything they perceive to not be of immediate importance to the back burner. By contrast, their peers in the west see the larger picture and realise the need for a solid foundation on which to build a business. Think of it as building a house, where the legal eagle you hire is your foundation and what you build from the surface level upwards is your business.

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