What is a liquidation preference?

A liquidation preference gives preferred shareholders the right to be paid a set amount — usually 1x the money they invested — before common shareholders receive anything in an exit or wind-down. It protects investors in downside outcomes: if a company that raised $30M sells for $30M, a 1x preference means investors take everything and common (founders, employees) gets zero.

The market standard is a 1x non-participating preference: the investor takes either their money back or their as-converted share of the proceeds, whichever is greater. Multiples above 1x or 'participating' preferences (double-dipping: preference plus the pro-rata share) are aggressive terms that mostly appear in distressed rounds.