An investor is interested in including a preferential liquidation right in an investment agreement to ensure that in the event of a liquidation event as defined above, he or she can obtain a certain return on his investment. An investment agreement usually includes provisions that allow investors to safely exit a fixed return after a given period. However, the need for preferential protection from liquidation arises in liquidation scenarios before the investor has obtained an exit. In this case, it is essential that the investor receives a return on his investment and that such a clause finds its place in an investment agreement. A day long (or co-sale) right is usually offered to holders of preferred shares when transferring shares in the start-up to a third party. This right gives the investor (as a minority shareholder and holder of preferred shares) the right to join the sale of shares to a third party. Investors and founders should be very careful when designing the day on the right, as the main players should try to limit the day along the right to circumstances where a large part of the start-up`s shares are sold, or in some other way, when the founders try to sell a significant percentage of their shares. Otherwise, any transfer of shares by a minority shareholder could trigger a flood of accepting shareholders (also known as taggings). A liquidation preference clause is generally included in investment agreements to protect investments made by investors in companies in the event of certain events.
A liquidation preference in general refers to the order in which payments are made in the event of a business liquidation. This clause is included in the investment agreement to ensure that investors are paid in liquidation before making payments to project proponents and other joint shareholders. The liquidity event within the meaning of investment agreements generally includes any merger, acquisition or sale of control of the business, or a sale, promotion or other sale of any or most of any real estate, assets or operations of the company, etc. A long-term subscription contract is usually entered into between the company, the founders and the principal investor (and, in some cases, the co-investor. These include broader provisions, which are normally intended to protect the interests of business investors (for example. B guarantees relating to the company`s situation, issues and accounts), and may also include requirements for restructuring the company`s management and operations before or after the investment cycle.