Liquidation Preference in Australia: 2025 Insights for Founders & Investors

When startups raise capital in Australia, the term ‘liquidation preference’ often crops up in heated boardroom discussions. Whether you’re an entrepreneur eyeing your first term sheet or an investor safeguarding your downside, understanding liquidation preference is crucial to protecting your interests.

In 2025, with venture funding rebounding and exit markets showing cautious optimism, liquidation preference clauses are evolving fast. Let’s unpack what this means for Australian founders and investors, how recent policy tweaks are influencing deals, and what to watch for when negotiating your next round.

What Is Liquidation Preference and Why Does It Matter?

Liquidation preference determines the order and amount investors are paid if a company is sold, wound up, or otherwise liquidated. Unlike ordinary shareholders, preferred shareholders (often VCs or angel investors) get their investment back — sometimes with a multiple or accrued interest — before founders or employees see a cent.

• 1x non-participating: Investors get back what they put in before others are paid.
• 1x participating: Investors get their money back and then share in the remaining proceeds with ordinary shareholders.
• Multiples (e.g., 2x, 3x): Investors get two or three times their original investment before anyone else is paid.

In a best-case scenario (a huge exit), liquidation preference may not matter much. But in a modest sale or wind-down, it can make or break how much founders and early employees receive. For instance, if a startup sells for $10 million and has $8 million in preferred capital with a 1x liquidation preference, only $2 million is left for ordinary shareholders.

2025 Trends: Policy Shifts and Market Realities

Australian venture deals in 2025 reflect lessons from recent years of market volatility. Here’s what’s changed:

• Push for Founder-Friendly Terms: As more founders become serial entrepreneurs, there’s pressure to limit harsh liquidation preference multiples. Most early-stage deals in 2025 are sticking to 1x non-participating — but late-stage rounds sometimes see 1.5x or 2x, especially if the company is perceived as riskier.
• Regulatory Focus on Transparency: The Australian Securities and Investments Commission (ASIC) has flagged opaque preference stacks as a risk to retail investors in equity crowdfunding deals. New 2025 guidelines encourage clearer disclosure of preference terms in offer documents, so all shareholders understand their position in an exit.
• Hybrid and Convertible Note Nuances: With the popularity of SAFE notes and convertible securities in Australia, more founders are navigating how liquidation preference converts upon triggering events. The 2025 market standard is for convertible securities to convert into ordinary shares at the next priced round, but investors sometimes negotiate for their liquidation rights to survive conversion.

Real-world example: In 2024, fintech startup SwoopPay negotiated a 1x non-participating preference for its Series B, despite pressure from overseas investors for a 2x multiple. This set a local precedent and emboldened other founders to push back on aggressive terms.

How to Negotiate Liquidation Preference in 2025

Whether you’re raising capital or deploying it, here’s how to ensure liquidation preference works for you, not against you:

• Clarify Type and Multiple: Always specify if the preference is participating or non-participating, and the exact multiple. Ambiguity leads to disputes.
• Scrutinise Stacking: In deals with multiple rounds, later investors may demand seniority in the preference stack. Founders should aim for pari passu (equal ranking) preferences across rounds where possible, to prevent earlier backers from being wiped out.
• Model Different Exit Scenarios: Use cap table modelling to see how each preference structure affects payouts under different exit values. This can reveal hidden risks for both founders and early investors.
• Leverage 2025 Market Data: Australian VCs now regularly publish anonymised deal term data. If your term sheet is out of step with market norms, use this data as a negotiation tool.

Remember, the right liquidation preference balances risk and reward for all parties. Excessive preferences may deter future investors or demotivate founders, while too little protection can make it hard to raise capital in volatile markets.

Conclusion: Make Liquidation Preference Work for You

Liquidation preference isn’t just legal boilerplate — it’s a powerful lever in every startup deal. As Australia’s venture landscape matures and regulations push for more transparency in 2025, founders and investors who master this concept will be better positioned for fair outcomes, whether the exit is a blockbuster or a soft landing.