November 30, 1999 in Uncategorized

Acronym Soup – L

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Liquidation preferences – a term in an investment term sheet that details how the investors will receive preferential treatment when a company reaches an exit.  During the crazy internet days, investors were asking for “2X” liquidation preferences.  This means that when a company is sold, the investor will be first in line to take their money and they will take an amount equal to twice the amount of their initial investment. Then everyone gets to split up whatever money is left.  Currently, most term sheets contain “1X” liquidation preferences, so they aren’t as bad.

Liquidity event – A fancy way to say, “I was able to sell part of my business for cash”.  An IPO is a liquidity event.  Sometimes a sell of the company is a liquidation event.  If you sell your company for cash or sell it to a public company, you are liquid.  If you sell it to another private company and just get stock in the acquiring company, you aren’t liquid.  You have to wait for that company to have a liquidity event before you pad your piggybank.

Liquidation – when a company discontinues operations and sells everything to raise cash to try to pay their debts.  Although the names of the terms are similar, this is almost the opposite of a liquidity event.

Limited Partner – Venture Capital funds raise their money from limited partners.  These are investors such as pension funds, universities, and high-net-worth individuals, all of whom pay annual management fees to have their money invested in high-risk, high-potential-yield start-up companies.  These limited partners don’t get to make the investment decisions.  They trust the General Partners to manage the money on their behalf.

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