Drafting 1x Straight Liquidation Preference Right- Not So Straight

Introduction

An increasingly common way of articulating 1x straight liquidation preference (LP) clauses in agreements related to early-stage venture deals is some variation of the following language - "The investor shall be entitled to receive, prior to and in preference to any distribution of the proceeds of the Liquidity Event to any other Shareholders, the higher of (a) an amount equal to 1X of the amounts invested by the investor; and (b) the investor's pro rata entitlement on an as if converted basis". This article argues that the above construct adds complexities in the later rounds and also has the potential to prejudice the interests of the very investors it seeks to protect.