Venture
Liquidation Preference
A liquidation preference is a contractual right, held by preferred shareholders (typically investors), to receive a specified multiple of their investment back before common shareholders (typically founders and employees) receive anything in an acquisition, liquidation or other exit event.
A standard "1x non-participating" preference means an investor gets the greater of their investment back or their as-converted common share of proceeds — they don't get both. "Participating" preferred stock, less common in current market conditions, lets an investor take their preference and then also share in what's left, which is materially worse for everyone else in the cap table.
Preferences stack by seniority in most deals, so in a modest exit the most recent, most senior investors can be made whole while earlier investors, founders and employees receive little or nothing — this is precisely the scenario liquidation preferences are designed to protect against for the investor writing the check.
The multiple (1x is standard; 2x or higher appears in distressed or high-risk rounds) and whether it's participating are the two terms in a term sheet worth scrutinising most closely, because their effect is invisible until an exit actually happens.