Liquidation preference
A term guaranteeing preferred shareholders get paid back before common shareholders in an acquisition or wind-down.
Liquidation preference determines payout order when a company is sold or shut down. Investors typically hold preferred stock with a "1x" liquidation preference — meaning they get their original investment back before common shareholders (usually founders and employees) see anything — before the remaining proceeds are split according to ownership percentage.
Preferences can be "participating" (the investor gets their preference amount back and then also participates in the remaining split pro-rata) or "non-participating" (the investor chooses either the preference or the pro-rata split, whichever is larger) — participating preferences are more investor-favorable and less common in founder-friendly markets.
Why it matters
In a modest exit, liquidation preferences can mean investors get paid in full while common shareholders get little or nothing — understanding the stack of preferences across all prior rounds matters if you're evaluating a company's realistic outcome for early holders.