What is liquidation?
Liquidation is the legal process of winding up a company’s affairs by selling its assets, paying its creditors and distributing any remaining proceeds to shareholders in the order specified by the corporate charter and applicable law. Liquidation may be voluntary (initiated by shareholders) or compulsory (court-ordered, typically following insolvency).
Liquidation order — secured creditors first, then unsecured, then preferred shareholders, then common — is rigorously enforced. Preferred-stock liquidation preferences in venture deals create the priority for early investors over founders and common holders.