Valuation: Valuation represents the agreed upon price at which the business is being valued in the fundraise. There is not set method for determining what the valuation of a business is, especially for early stage companies. It is simply a number to be negotiated between the business and potential investors. Investors will want a lower valuation, so that they receive a greater percentage ownership in the business. Businesses will want a higher valuation, so that they give up less ownership. Typically with early stage businesses, you can expected to give up anywhere between 20% and 50% of your company in a preferred equity fundraise. Typical valuations for early stage businesses range from in the hundreds of thousands to $5 million.

Liquidation preference: A liquidation preference represents the order in which proceeds of the business are distributed in the event that the business is sold. Often, preferred equity will come with a 1x liquidation preference, meaning investors receive 1 times their investment back before any other funds are distributed to any other owners of the business (i.e. the common equity holders). In this scenario, investors would receive their money back, and then any additional proceeds would be distributed ratably (based on the percentage of the business each investor owns).

So if the company is sold for $10 million, and preferred equity investors previously invested $1 million, which represented 25% ownership of the company, preferred equity investors would receive the first $1 million + 25% of the remaining $9 million, or a total of $3.25 million in the sale. So while they owned just 25% of the company, they received a total of 32.5% of the proceeds from the sale of the company.