Liquidation overhang arises when accumulated liquidation preferences (especially stacked or multiple preferences) exceed or consume most of a company’s exit value, leaving common shareholders — founders and employees — with disproportionately little. It is a common consequence of raising at high valuations with aggressive preference terms.

A large overhang can demotivate the team and complicate exits, sometimes requiring preference renegotiation or carve-outs for management to get a deal done. It is a key reason founders should scrutinize liquidation-preference multiples and participation, not just valuation.