Preference Shares

These shareholders advance funds to the company and in return, they get the first bite of the profits in the form of dividends (called the preferred dividend – the rate negotiated on a case by case basis).

Also, if the company goes belly-up or gets sold, preference shareholders will usually be paid out ahead of ordinary shareholders (called the liquidation preference – which can even be in multiples i.e. a preference shareholder could negotiate receiving two times his investment prior to ordinary shareholders getting a piece of the pie).

So, simply put, preference shares trump ordinary shares as they normally receive preferential treatment at a distribution or liquidation event.

There are a couple of additional characteristics that could come in to play and it is important to have a proper understanding of these characteristics when negotiating with investors.

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