1x non-participating preference

What it means

A liquidation preference decides what a preferred shareholder receives when the company is sold, before the common shareholders receive anything. The 1x means the multiple is one, so the investor is entitled to the amount they invested and no more. Non-participating means they take either that amount or their percentage of the proceeds as though they had converted to common, whichever is larger, and never both. Together the two words describe the mildest common form of the term and the one most European and UK seed rounds are written on.

Why it matters

It is the term that decides whether a decent outcome is a good one for the team. Because the investor takes the larger of two numbers, the preference is invisible on a strong exit, where their percentage is worth more than their money back and they simply convert. It only binds on a weak one, which is precisely the situation it was written for. Any deviation, a higher multiple or the addition of participation, moves money from the founders and employees to the investor in the middling outcomes that are statistically the most likely.

Worked example

An investor put in EUR 5m for twenty five percent on a 1x non-participating preference. Sell for EUR 12m and their percentage is worth EUR 3m against a preference of EUR 5m, so they take the preference and the common splits EUR 7m. Sell for EUR 40m and their percentage is worth EUR 10m against the same EUR 5m preference, so they convert and take EUR 10m, and the preference never comes into it. The crossover sits at EUR 20m, which is the exit value at which twenty five percent is worth exactly the EUR 5m invested. Below it the term matters, above it it does not exist. The crossover moves with the stake rather than with the preference: had the same EUR 5m bought forty percent instead of twenty five, the investor would convert at any exit above EUR 12.5m, so the term would matter across a much narrower band.

The common mistake

Assuming the preference is always subtracted. On a good exit a 1x non-participating investor converts and takes their percentage, so modelling the exit as sale price minus preference, then split, understates the founders' proceeds at high values and overstates the investor's. The other mistake is negotiating the multiple while ignoring the seniority, because on a poor exit with several rounds outstanding the order of payment decides who is made whole and a 1x that is paid last can be worth less than a 1x that is paid first.

In practice

This is the standard and the thing to hold. If an investor asks for more, the useful question is which risk they are pricing, because a 2x preference or added participation is usually a substitute for a lower valuation rather than a separate demand. It is often better to take a lower headline valuation with a clean 1x non-participating preference than a higher one with structure attached, and it is worth modelling both at several exit values before deciding.

What to ask

Ask three things in order: what is the multiple, is it participating, and where does it sit in the seniority stack. Those three answers together determine the entire payout, and any one of them alone tells you very little. If the multiple is above 1x or the preference participates, ask what the investor would need in exchange for a clean 1x non-participating term, because the answer is usually a lower valuation and that is a trade worth considering rather than refusing. Then ask for the total preference across all rounds, including this one, since that figure is the sale price below which the common shares are worth nothing, and it is the single most useful number a founder can carry in their head. Write the total preference figure down and keep it current, because it is the number every acquisition conversation will turn on and you will want it to hand rather than to derive.

Related terms

• Participating preferred stock Preferred shares that take their liquidation preference and then also share in what is left over.
• Liquidation preference stack The order in which several rounds of preferred shares get paid when there is not enough to pay them all.
• Dead zone The band of exit values across which the common shareholders receive nothing extra, however much the price rises.