Do investors get their money back if the business fails? In the complex world of corporate liquidations, who gets paid first? How does the hierarchy of creditors and shareholders affect potential recoveries? Discover what happens to your investment when a company shuts its doors and assets are sold off.
Do Investors Get Their Money Back If the Business Fails?
Investors get their money back depending on the type of investment they made and the financial situation of the business at the time of failure. Do investors get their money back if the business fails? Let’s address the question by looking at the investor breakdown:
Equity Shareholders
Preferred Shareholders – Preferred shareholders have a higher claim on company assets than common stockholders, however, they are behind in line with creditors. Preferred shareholders may recover some money if there are funds available after all debts and liability obligations have been paid. Though preferred stockholders may receive liquidation proceeds does not mean they are immune to suffering a loss.
Common Shareholders – In bankruptcy proceedings, common shareholders are last in line to be paid. Once company assets have been liquidated, all debts have been paid, and preferred shareholders receive funds proportionate to their ownership percentage, any remaining funds are distributed to common shareholders. In most cases, little to nothing is available to these stockholders meaning their entire investment may be lost.
Debt Investors: Bondholders and Creditors
Secure Creditors – These debt investors have lent collateralized loans to the company. They have the first claim on the firm’s assets in the event of a business failure. These investors have a high likelihood of recovering all or part of their investment depending on the proceeds generated from the sale of their collateral.
Unsecured Creditors – Unsecured creditors can be bondholders or uncollateralized lenders. They are paid after secured creditors and before equity investors. Depending on the remaining available funds, these unsecured investors may realize partial or no recovery of their investment.
Private Investors: Venture Capital (VC) and Private Equity (PE)
VC and PE Investors - Private equity investors and venture capitalists (VCs) hold equity stakes in companies and are exposed to the same risks as other equity stakeholders. Depending on if there are any residual proceeds remaining after all investor pecking order and debt obligations have been satisfied, they may recoup all, some, or none of their initial investment.
Do investors get their money back if the business fails? Whether investors get their money back if a business fails largely depends on the type of investment made. Are you a shareholder, a bondholder, or a secured or unsecured creditor? Each role comes with different levels of risk and potential recovery. What are the key points you should consider before investing?
Key Points to Consider
Risk of Loss - Equity investors are at the highest risk of losing their entire investment if the business fails.
Recovery for Creditors - Debt investors and secured creditors have a better chance of recovering some or all their money, depending on the value of the company’s remaining assets.
Do investors get their money back if the business fails? Investing in businesses, especially startups or high-risk ventures, carries the potential for total loss, which is why it's crucial for investors to diversify their portfolios and assess their risk tolerance.
Read next: What is the Difference between Dissolving and Liquidating a Company?
