The word “preference” flows from “preferred” and means the shares of the preferred stock will have a priority over (or ‘be treated better than,’ if you prefer) the common stock in the event of a liquidation. For example, in bankruptcy, once the company’s creditors have been paid off, any remaining assets would be distributed to the holders of the preferred stock before common stock shareholders see a dime.
Similarly, if the company were sold, the proceeds of the sale would be distributed first to the holders of the preferred stock and then to the holders of the common stock, based upon the terms of the liquidation preference.
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“Liquidation preference” refers to the dollar amount that a holder of a series of preferred stock will receive prior to holders of common stock in the event that the company is sold (or the company is otherwise liquidated and its assets distributed to stockholders). For example, if holders of preferred stock have a liquidation preference equal to $30 million and the company is sold, they will receive the first $30 million before common stockholders receive any amounts. The liquidation preference amount can be paid in cash or stock of an acquiror.