Finance: What is liquidity preference?

What is liquidity preference? When a company goes under, a company’s assets are liquidated to pay back creditors and then shareholders. The liquidity preference refers to the pecking order of priority for repayment. Secured creditors who possess liens on hard assets, such as a building or land would be repaid first. Unsecured creditors, such as vendors and suppliers would be next. Venture capitalists or institutional investors with preferred shares would be next, and common stockholders are last.

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Transcript

00:27

all else being equal is preferable. see the liquidity preference . specifically if

00:32

you have liquidity preference and usually this is found in the form of

00:36

early stage of venture capital investor term sheets for investing in companies

00:41

in the form of convertible preferred stock- like it converts into common at

00:46

the IPO or something like that- then you get paid before everyone else

00:49

gets paid -at least in this form of stock- if the company gets sold.

00:53

all right well technically that is, but the company is sold and your convertible

00:57

preferred hasn't converted into common shares yet this company didn't go public. [convertible stock made into common stock]

01:01

but so like let's think about the example where if the company raised

01:05

twelve million bucks in preferred stock, which all had a liquidity preference

01:09

over and above common ,and then the whole company was sold for just fifteen

01:13

million dollars. well then those with liquidity preference would get liquid

01:18

first .ie they get their twelve million bucks. then the remaining three million

01:22

would be sprinkled around everyone else who was do the dough. plus any dividends

01:28

or accrued assets that have come our way otherwise. and yes technically debt

01:33

holders get paid ahead of the various series preferred investors who then get [list of who gets paid first]

01:38

paid ahead of the common shareholder but that's a different video. all right so

01:41

when it comes down to it you want to have liquidity preference. clearly I

01:45

prefer to be liquid myself. [man floats in lake in an inner tube]