[gamblor956]

If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK

Debt holders do not have priority when the debtor is sold, as the debtor remains in existence. Creditor priority generally matters only where an entity's debt structure is being altered, such as in a bankruptcy, liquidation, or debt restructuring. However, your example is correct if the bank held convertible debt, exercised the option to convert the debt to equity, and the converted equity carried a liquidation preference. (Note that "liquidation" shows up twice in this paragraph but the two usages have very different meanings. "Liquidation" refers to the termination of a corporate business and the distribution of its assets to its creditors and shareholders; "liquidation preference" refers to the maximum return a preferred stockholder may receive when it "liquidates" its holdings in a company as part of an exit event before the common shareholders or subordinated preferred shareholders receive their returns. In the Non-VC world, liquidation preferences are almost always fixed numbers; in the VC-world, liquidation preferences are usually multiples.)

[ChuckMcM]

It would be more accurate of me to say that "In my experience, banks require terms in their lending contract to a startup that results in their notes being paid before anything else."

Clearly there are legal regulations around a company going through bankruptcy and/or restructuring, however when an acquisition is occurring outside the structure of dissolution, which is to say the company is being sold to another entity while it is nominally a going concern, the bank's note may (and my experience does) have specific language to cover that situation and its primacy with respect to where the funds from such a sale might be disbursed :-). The good news is that can also keep a bank from "forcing" a company into default which starts to limit what options they have going forward.