The liquidation preference stipulates that the VC fund will receive, at minimum their initial investment back if the company exits for a lower than anticipated value in a liquidation event. It protects the VC fund's interests in the event of a liquidation bankruptcy, or sale, and protects their downside risks by making sure they get their money back before other investors get their money.

An exit for a company is typically a sale whereby all the current shareholders are bought out, or it may be an IPO. An IPO is an initial public offering and would require a series of stringent steps to be followed so that the company could list on the stock market. This would allow shareholders the opportunity to sell their shares to new buyers and allow the shares to be traded on the open market. An exit may also refer to the VC fund, selling its stake, possibly to another VC fund, which will have different expertise to unlock more growth in the company.