We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
1X Explained: The Legal Significance of Liquidation Preferences
Definition & Meaning
1X refers to a "one times original purchase price" liquidation preference. This means that in the event of a liquidation, holders of preferred stock will receive an amount equal to their original investment before any remaining assets are distributed to common stockholders. The term "1X" indicates that the preferred stockholders are entitled to receive their initial investment back, plus any unpaid dividends, but will not participate in any further distributions once they have received this amount.
Table of content
Legal Use & context
This term is commonly used in corporate finance and venture capital transactions. It is particularly relevant in the context of liquidation events, such as mergers, acquisitions, or company dissolutions. Understanding 1X liquidation preferences is crucial for investors, as it affects their potential returns and risk exposure. Users can manage related documents and agreements using legal templates provided by services like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A startup raises $1 million by issuing Series A Preferred shares with a 1X liquidation preference. If the company is sold for $5 million, the Series A holders will first receive $1 million before any proceeds are shared with common stockholders.
Example 2: A company with a 1X liquidation preference is liquidated, and it has $500,000 in assets. The preferred shareholders will receive their original investment back, but there will be no remaining assets for common stockholders. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Key Differences
California
Commonly includes additional terms for participation rights.
Delaware
Often has more standardized terms in corporate bylaws.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
1X Liquidation Preference
One times original purchase price preference for preferred shareholders.
Only returns the original investment; no additional participation.
Participating Preferred Stock
Preferred stock that receives both liquidation preference and a share of remaining assets.
Participates in additional distributions beyond the original investment.
Common misunderstandings
What to do if this term applies to you
If you are an investor or a company considering a liquidation event, it's important to understand your rights and obligations regarding liquidation preferences. You may want to:
Review your investment agreements to understand the specific terms of your liquidation preference.
Consult with a legal professional for tailored advice.
Explore US Legal Forms for templates that can help you manage related documentation.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.
Typical preference: 1X means original purchase price.
Common in venture capital and private equity.
First in line during liquidation events.
Key takeaways
Frequently asked questions
It means that preferred shareholders will receive an amount equal to their original investment before any remaining assets are distributed to common shareholders.
No, with a 1X liquidation preference, they only receive their original investment back, plus any unpaid dividends.
1X liquidation preference does not allow for additional participation in remaining assets after the original investment is returned, while participating preferred stock does.