Adapted from the Polish article, originally published on 05 October 2026. The English version was published on 05 October 2026.
Imagine a SaaS company that raised PLN 3 million for 20% of its equity. The founders own the remaining 80%. A buyer arrives, and PLN 6 million is available for distribution to the shareholders.
The founders expect PLN 4.8 million. The investor points to the liquidation preference. Depending on the agreed terms, the founders might receive PLN 3 million, PLN 2.4 million or nothing from that pool.
A liquidation preference gives an investor priority in the distribution of proceeds when a specified event occurs. Ownership percentages alone do not tell you what each shareholder receives. The commercial mechanism can cover an exit as well as a formal liquidation; its implementation depends on the governing law and transaction structure.
What does a 1x liquidation preference mean?
A 1x preference gives priority up to one times the agreed reference amount, commonly the investment amount. For a PLN 3 million investment, that means PLN 3 million of priority, subject to the documents’ calculation rules and any additional amounts.
Priority applies to the money available. If only PLN 1 million remains, a PLN 3 million preference does not create another PLN 2 million. The preference alone is not a founder guarantee to repay the investment.
For the calculations below, assume one investor, no debt, no other preferred holders and no additional entitlements. The PLN 6 million pool is already available to equity holders, before their individual taxes. Using PLN keeps the example consistent with the Polish counterpart; the arithmetic works the same way in another currency.
Non-participating: the preference or the ownership share
With a 1x non-participating preference, the investor receives the more favourable of its preference and its share of the entire pool without the preference. It does not then take another percentage of the remainder. The documents specify the election or conversion mechanics.
Here, the investor compares PLN 3 million with 20% of PLN 6 million, or PLN 1.2 million. It receives PLN 3 million. The founders share the other PLN 3 million, despite owning 80%.
At PLN 20 million of available proceeds, 20% is PLN 4 million. The investor receives that amount instead, leaving PLN 16 million to the founders. The two outcomes meet at PLN 15 million: PLN 3 million divided by 20%.
Run several exit values. A spreadsheet built around one successful outcome can make a preference look irrelevant when it materially changes a more modest sale.
The NVCA model Certificate of Incorporation updated in October 2025 illustrates the greater-of approach using the preference and an as-converted common-stock calculation. It is a Delaware company model, not a provision ready to paste into a Polish company’s articles.
Participating: priority followed by a share of the remainder
A participating preference allows the investor to receive its preference and then share in the remaining proceeds under the agreed formula. Our example uses the investor’s 20% holding for the second step.
The investor takes PLN 3 million first. Of the remaining PLN 3 million, it receives another PLN 600,000. Its total is PLN 3.6 million, leaving PLN 2.4 million to the founders.
The ownership has not changed. The distribution sequence, often called the exit waterfall, has.
| Terms | Investor receives | Founders receive |
|---|---|---|
| No preference: 20% / 80% | PLN 1.2 million | PLN 4.8 million |
| 1x non-participating | PLN 3 million | PLN 3 million |
| Uncapped 1x participating | PLN 3.6 million | PLN 2.4 million |
| 2x non-participating | PLN 6 million | PLN 0 |
Each row uses a PLN 3 million investment and PLN 6 million available pool. These are alternative agreed economics, not a statutory distribution rule.
Does a participation cap limit the investor’s total return?
A cap can limit the combined preference and participation payout. Check whether the investor can instead elect an ordinary percentage distribution. “2x cap” alone does not answer that question.
A 2x cap on a participating preference would limit that route to PLN 6 million in our example. If the investor can give up the preference and receive 20% of the overall proceeds, a sufficiently large exit could pay it more than PLN 6 million.
Model the capped route and the ordinary route separately. A limit on one calculation is not necessarily an absolute ceiling on the investor’s proceeds.
What changes when the startup raises another round?
Another investor introduces another priority question. A senior preference ranks ahead of another series. Pari passu preferences rank at the same level and share available proceeds using the agreed allocation, for example in proportion to their preference entitlements.
If the next round ranks ahead of the first, it changes the first investor’s outcome as well as the founders’. Include convertible instruments and employee equity rights in the model. Updating percentages without updating the waterfall misses part of the deal.
Pro rata and anti-dilution address participation in later financing and price dilution. Liquidation preference determines how the resulting rights translate into exit proceeds.
Match the waterfall to the transaction
Start by identifying who receives the buyer’s money. A share sale, an asset sale and a formal winding-up involve different payment routes. The following implementation points concern a Polish limited liability company, a sp. z o.o.
Share sale
The buyer pays the selling shareholders. The shareholders’ arrangements and sale documents need to implement the allocation, including payment instructions where appropriate. A preference covering formal liquidation does not itself determine what a buyer pays for shares.
Check the connection with tag along and drag along. A right to require shareholders to sell and a rule allocating the price need to work together.
Asset or business sale
The company receives the price. Paying that money to shareholders requires a lawful distribution route, taking account of the company’s obligations and tax treatment. A term-sheet waterfall alone does not authorise the company to transfer the sale proceeds to its owners.
Formal liquidation
Creditors must first be paid or secured. For a Polish sp. z o.o., the remaining assets cannot be distributed before six months have passed from publication of the opening of liquidation and the call for creditors. The default allocation follows shareholdings, but the articles can provide different rules. See Articles 174 and 286 of the Polish Commercial Companies Code.
Investor priority among shareholders does not put the investor ahead of company creditors. The investment documents must respect capital-protection and liquidation rules.
Five points to settle before signing
Ask for a waterfall calculated from the proposed wording, then review:
- Trigger events. Does the preference cover a control sale, all shares, key assets, a merger or formal liquidation? What happens in a partial exit?
- Amount and ranking. Which investment amount counts, what multiplier applies, and how do several rounds share insufficient proceeds?
- Participation and elections. Does the investor also share in the remainder? How do the cap and ordinary-equity alternative interact?
- Deferred proceeds. Escrow holds back money as security; an earn-out makes additional consideration depend on future results. Specify how each payment and any clawback enters the waterfall.
- Sale liability. Decide who bears price adjustments and buyer claims. The preference does not automatically allocate that responsibility.
Carry the economics from the term sheet into the appropriate corporate, shareholder and transaction documents. Different payment routes may require different legal mechanisms.
What should founders take into the negotiation?
Bring a model covering a sale below the total preferences, a moderate exit and a strong exit. Add the next financing round and payments made over time. Show the amount each person receives, rather than stopping at each class of shares.
If a moderate sale leaves little for the founders, discuss that during the investment negotiations. Reopening the economics when the buyer is ready to sign is considerably harder.
Our startup legal support can review the waterfall alongside the cap table and investment documents. Tell us where the round stands and share the proposed terms so the discussion can start with the actual payout calculation.
Sources and verification date
Verified on 5 October 2026. The calculations use the expressly stated assumptions; actual distributions depend on the documents and deal structure.
- Polish Commercial Companies Code, particularly Articles 174 and 286: preference rights and liquidation distributions in a Polish sp. z o.o.
- NVCA Certificate of Incorporation, October 2025 update: an example of documenting priority, calculation and covered events for a Delaware company.