What is the preference of liquidation?

also known as the absolute priority, and the preference of liquidation is a formula that defines the payment order when the company is in the liquidation process. This type of preference usually dictates that creditors' claims are solved and resolved before shareholders pay off any payouts. Even among the shareholders, the process of liquidation preference requires that holders of specific shares types receive compensation than investors who hold other types of shares will gain any advantage of selling the company's assets.

One of the advantages of the preference of liquidation is that creditors are first entitled to any funds generated by the sale of the company's assets. This means that if the company either shuts down or goes bankrupt and the current cash reserves are not sufficient to settle the outstanding debts, sufficient assets are sold to settle these debts. The creditors are awarded a priority in front of shareholders, which means they receive payment before Anyone otherwise. Protection of investment that suppliers and creditors do in businessBy expanding the loan of this company, the Act on liquidation preference in fact makes it easier for businesses to buy the necessary goods and services without paying cash in advance.

The concept of liquidation preference also means that investors who hold the stocks of preferred shares receive some type of settlement or compensation with the shares of the ordinary shares. This is usually because investors who decide to purchase preferred shares understand that they accept a greater degree of risk in exchange for more revenues than could be possible for the shares of the ordinary shares. In terms of conditions related to preferred shares, investors are sure that if the company falls, the chance to restore most of their investments is better than the trays on those with ordinary stock options.

While businesses usually do not intend to fail, investors should be before doing any type of investTice carefully look at the potential of any business. This is especially true for risk capitalists who invest funds in companies with significant potential, but usually very little in the path of the proven result. In this scenario, the investor participating in the risk capital strategy would understand what rights the company must transfer preferred shares to the ordinary share before the liquidation process, as this type of draft could reduce the amount of compensation as soon as liquidation preferences were caused.