“When the founders ask for aggressive valuations, then VCs would ask for 2x, 3x liquidity preference to mitigate their risk. It is nothing but a promise from founders on assuring the return on capital investment to VCs on an event of liquidation, merger or sale of business. The way it works is that the last investor would be the first to be paid in case of an asset sale and promoters would be the last to get paid,” VC firm 100X.VC founder, Sanjay Mehta, said.

Read More: Amid uncertainty, startup investors may exercise liquidation preference clause.